Oireachtas Joint and Select Committees
Thursday, 26 September 2013
Public Accounts Committee
Annual Report and Financial Statements 2012: Discussion with National Asset Management Agency
10:10 am
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Before we begin, I remind members, witnesses and those in the public gallery to turn off their mobile telephones as they affect the sound quality and the transmission of the meeting.
I advise witnesses that they are protected by absolute privilege in respect of the evidence they are to give this committee. If they are directed by the committee to cease giving evidence in relation to a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise nor make charges against a Member of either House, a person outside the House or an official by name or in such a way as to make him or her identifiable.
Members are reminded of the provisions within Standing Order 163 that the committee shall also refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government or the merits of the objectives of such policies.
I welcome Mr. Brendan McDonagh, chief executive officer of the National Asset Management Agency, NAMA. I invite him to introduce his officials.
Mr. Brendan McDonagh:
With me are Mr. Frank Daly, chairman of NAMA, Mr. John Mulcahy, head of asset management, Mr. Ronnie Hanna, head of asset recovery, Mr. Donal Rooney, chief financial officer, and Ms Aideen O'Reilly, head of legal. Also present is Mr. Declan Reid from the Department of Finance.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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I ask the Comptroller and Auditor General to introduce the accounts.
Mr. Seamus McCarthy:
The National Asset Management Agency is tasked under the National Asset Management Agency Act 2009 to acquire loans from certain Irish financial institutions, to protect and enhance the value of the assets it has acquired and to dispose of those assets or the underlying collateral in a timely manner. A key objective for NAMA in its management and ultimate disposal of the assets is to maximise the return to the State.
The process of transfer of the targeted loan assets to NAMA was completed in 2011. The acquisition values for the loans were finalised in 2012. NAMA has paid a total consideration of €31.8 billion for the loans acquired. This was 43% of the gross amount of €74 billion owed to the financial institutions by the related debtors. That debtor liability transferred in full to NAMA.
To facilitate effective management of the individual loans, NAMA has grouped them on a debtor connection basis. Each portfolio of loans is managed collectively. NAMA undertook a comprehensive business plan process whereby each debtor connection was required to submit a business plan for the connected portfolio of loans, setting out proposed debt repayment strategies.
NAMA concluded its assessment of the individual debtor business plans in 2012. Arising from this process, it has adopted a management strategy in respect of each of its debtors. At the end of 2012, NAMA had agreed a support or disposal strategy in 76% of cases. In the remaining 24% of cases, an enforcement strategy was determined as the optimum approach.
The financial statements for 2012 received a clear audit report, which issued on 2 May 2013. Without qualifying my audit opinion, I have drawn attention to Note 2.1 in the financial statements. This describes NAMA's main funding source, which is in the form of short term borrowing with a Government guarantee. The note explains the basis on which the board is satisfied that it was appropriate to prepare the financial statements on a going concernbasis. Some of the key financial highlights for 2012 are: NAMA generated a profit, after impairment, of €228 million; interest on loans recognised in the year amounted to €1.2 billion; just under €3 billion was raised in 2012 from the sale of underlying collateral and loan assets; the 2012 impairment charge of €518 million on loans and receivables reflects a net deterioration over the year in NAMA's projected cashflows from its loan assets - the total accumulated impairment charge to end 2012 was €3.3 billion; the carrying value of loans and receivables at end 2012 was €26 billion before impairment; by end 2012, NAMA had redeemed €4.75 billion of its initial borrowing.
Two special reports on NAMA have been published by my office to date. The first report, published in October 2010, reviewed the asset acquisition process and the governance and procurement structures put in place. The second report, published in May 2012, reviewed the loan acquisitions to date and the profile of the collateral underlying the loans acquired. It also looked at how NAMA manages its relationships with borrowers and at the results of its initial debt management activities. It found that a major challenge faced by NAMA was to ensure that remittances by debtors out of their rental income were based on up-to-date control listings.
Under section 226 of the NAMA Act, I am required to carry out an assessment of the extent to which NAMA has made progress in achieving its overall objectives. The analysis to underpin the report has been substantially completed and the report is now being drafted. I expect that the report will be finalised in the coming months.
10:20 am
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Thank you. I now invite Mr. McDonagh to make his opening statement.
Mr. Brendan McDonagh:
NAMA's appearance before the Committee of Public Accounts today arises from the publication some months ago of its results for 2012. For the second year in succession, NAMA is in a position to report profits after impairment despite the difficult market conditions that prevailed in Ireland in 2012. Before discussing our 2012 results in greater detail, I would like to make a few general comments about the mandate which members, as legislators, gave NAMA and the progress we have made in fulfilling it.
Approximately four years ago, the Oireachtas enacted the legislation which established NAMA. Crucially and commendably, section 10 of the NAMA Act outlines the primary objective set by the Legislature for NAMA, namely, to achieve the best financial returnfor the State from the assets entrusted to it. That statutory clarity has been very important in guiding us over the past four years, particularly when faced with a broad range of public views as to what NAMA should be doing.
At the time of its establishment, it was widely accepted that NAMA could not expect to fulfil its commercial objective quickly given the scale of its loan acquisition of over €70 billion and the distressed state of the Irish property market. There was an acceptance that the taxpayers' best interest would be served, in the words of the Act, "by protecting or otherwise enhancing the value" of the acquired assets. This is what we have sought to do. We adopted two key principles: no fire sales and no hoarding. The board's Business Plan of July 2010 refers to a "phased and orderly" disposal of assets. A NAMA fire sale in the Irish market over the past three years would have caused serious disruption and would have had the effect of crystallising a major loss for taxpayers, on top of the losses that they have had to fund in recapitalising the various financial institutions. Instead, our approach has been to release assets for sale in the Irish market in a manner which takes account of the market's capacity to absorb them. It should be borne in mind that even in 2006, at the peak of activity, there was only €3 billion of investment activity in the Irish market and fewer than 100 transactions.
Within our overall approach, we are pragmatic. Every asset supporting our loans is ultimately for sale and we are always open to reasonable offers. The reality is that there is limited demand for some segments of our portfolio in current Irish market conditions. Our approach to assets which are not currently for sale is to protect and enhance them, through asset management, so as to maximise their ultimate sale value when market conditions improve. This means ensuring that rental income from assets is maximised and that it is applied towards meeting debtor liabilities to NAMA.
Our phased asset disposal approach not only makes commercial sense but is also in line with the rationale underlying the EU Commission's approval for the NAMA scheme in 2010. The Commission took the view that State aid under the NAMA scheme was permissible if the State had a reasonable prospect, over a medium to long term horizon, of recovering NAMA's outlay on the acquired loans. The Commission approved the payment of an acquisition price corresponding to the long-term economic value of the loans. It did so on the basis that NAMA would be in a position to recover this over an expected ten-year life span as market conditions normalised and the Irish economy recovered. It was well acknowledged that the recovery of a very distressed Irish market in a distressed global economy would only be gradual.
When EUROSTAT determined in 2009 that NAMA debt would not be treated as part of the general Government debt, it did so on the basis that NAMA was established for the sole purpose of addressing the financial crisis, that it had a finite life span and that it was not expected to make material losses. This fits well with NAMA's key objective which is to ensure that the Irish taxpayer will not be faced an additional financial burden after we have completed our work. For all of these reasons, we do not view our mandate as being the management of a massive fire sale which would have the effect of imposing a greater financial burden on the State. We have instead adopted a phased and orderly approach in dealing with the disposal of our Irish assets, with a view to recovering what we believe to be their intrinsic value. By contrast, we have been very active in the British market in terms of asset sales because of the level of demand for those assets, the depth of the market relative to our asset holdings and the strong price performance of London and the south east over recent years.
One of the principal measures of our progress is the repayment of NAMA senior debt. We issued just over €30 billion in Government-guaranteed senior debt to the financial institutions from which we acquired the loans in 2010 and 2011. We will redeem €750 million next week, thereby bringing the cumulative redemption to date to €7 billion. We expect to reach our target of €7.5 billion, 25% of senior debt, by the end of this year. We further expect that another 25% of senior debt will be redeemed by the end of 2016. This will leave €15 billion of NAMA's senior debt to be redeemed after 2016. Our current view is that we will be in a position to redeem all of our senior debt by 2020 and thus eliminate the State's contingent liability.
To meet our debt redemption targets, cash is key for NAMA. As of last Friday, we had generated €13.7 billion in cash, including €9.2 billion in disposal receipts,from property and loan sales and €4.5 billion in other income,mainly rental income from assets controlled by our debtors and receivers. We have secured over €800 million in additional security for debtors' loans by taking charges over previously unencumbered assets and by reversing asset transfers. Much of the cash generated has been applied towards repaying NAMA'S senior debt. As I mentioned, €7.5 billion is scheduled for redemption by the end of this year. We also need to have sufficient cash reserves available to cover our costs, including debt interest and loan servicing fees to the banks. We also need cash to invest over the next three years in various commercial and residential projects which, when completed, are expected to yield a strong return for the taxpayer. By the end of August this year, we had approved funding of €2 billion across our entire portfolio, €900 million of which relates to Ireland. It is important to note that NAMA is self-funding and does not cost the Exchequer anything and, therefore, is not a burden for the Government in the context of its annual budgetary arithmetic.
Having emphasised earlier that we are not engaged in a fire sale, it is important to draw attention to the many ways in which we are stimulating transactions in the Irish market. By approving asset sales by debtors and receivers, we are releasing a substantial flow of properties into the market. Our debtors and receivers have sold over 2,000 individual properties in Ireland to date and currently have €1.5 billion worth of Irish residential and commercial property on the market. This will increase by a further €350 million to €400 million over the coming weeks as we will be bringing two portfolios, mainly high quality offices and residential, to the market. These portfolios will be attractive to the large institutional buyers in the markets, including the promoters of recently-established and proposed new REITs. We have indicated that we are willing to lend €2 billion in vendor finance to support transactions involving commercial property and loans. We have already advanced €375 million of this in five transactions and there are a number of other transactions in the pipeline. We are also working closely with the IDA to facilitate the provision of accommodation for large businesses which have plans to create jobs in Ireland. These include Novartis which has entered into a letting transaction for a number of office blocks at Elm Park in Dublin. Other significant transactions include the purchase by Scottish and Southern Energy of its new corporate headquarters at Leopardstown and the investment of over €100 million by the Kerry Group in a new facility at Millennium Park in Naas. We hold security over a large number of properties and lands in the Docklands area of Dublin. The decision by Dublin City Council to establish a Strategic Development Zone, SDZ, in the area is a very positive move.
There would appear to be a good fit between NAMA properties in the docklands area and the need to accommodate the continued expansion of the financial services and technology sectors. There are, however, various planning and infrastructural obstacles to be overcome and we continue to engage extensively with Dublin City Council with a view to promoting ideas which will hopefully resolve these issues.
There are numerous other similar examples of development initiatives to which we are advancing funds and development capital. These include The Square shopping centre in Tallaght, the Beacon South Quarter in Sandyford, the Charlestown shopping centre in Finglas, as well as Scotch Hall in Drogheda and developments in Cork, Kildare and Galway. There are other initiatives where we are at an advanced stage of evaluation of their commercial viability.
One area of our activity which attracts regular comment is social housing. Relative to the number of applicants on housing lists, which was estimated by the housing authorities to be close to 100,000 in 2011, NAMA debtors and receivers did not have a large stock of housing units available for sale or lease, but we moved quickly to identify those which might be suitable and we have been very active since in expediting delivery to the extent that it is within our control. To date, we have offered 4,350 units to the local authorities, with approximately 2,150 of these either deemed to be unsuitable or no longer available by the time the authorities had assessed their suitability. Another 300 are still being assessed, which leaves approximately 1,900 which have been deemed suitable by the local authorities. Over 400 of these have been delivered or contracted to date, with at least another 200 by year-end; for the other 1,300, we are awaiting the final go-ahead to acquire them on the assumption that they will be deemed suitable by the housing agency or local authority concerned.
Let me emphasise that all we can do is to identify the units, offer them to the local authorities and housing bodies and then await their formal agreement to contract. The pace at which units are delivered to the people who need them is largely beyond our control. In some cases, certain works are needed to finish the units and we have provided funding of €10 million to enable at least 600 housing units to be delivered by the end of this year. Often, there are issues with certification, performance bonds and levies and compliance with legislation such as the Multi-Unit Developments Act. It is untrue to suggest that NAMA is responsible for the slow pace of delivery to date and I will confine myself to the suggestion that the earlier everyone engages, the sooner progress will be made on this important issue.
With market activity in Ireland, there has been a lot of positive development this year. The residential market in certain urban areas appears to be stabilising and commercial prices are improving, with the volume of investment transactions already well up on last year. It is estimated that close to €1 billion of transactions have been completed by the end of August, which is almost twice the level achieved in the whole of 2012. The nature of investor interest has also changed and we are seeing fewer investors with overly ambitious return expectations and short payback horizons. We are seeing instead more interest from long-term players, such as pension funds and real estate investment trusts, which tend to focus more on the long-term income generated by assets than on the prospect of near-term price appreciation. This is a welcome sign of a market easing back towards normalisation. However, I would caution that the resurgence evident in the Irish market is not yet broadly based or homogenous. Investors are mainly interested in prime Dublin office space and income-yielding apartment blocks. There are only a limited number of such assets available in the NAMA portfolio or anywhere else for that matter. As the supply of available prime assets reduces relative to demand and as economic recovery gathers pace, we can expect investor interest to diversify both geographically away from Dublin and also into a broader range of asset classes as investors seek yield in a low interest rate environment.
I will turn now to our results in 2012. I am pleased to report that we recorded an operating profit, before impairment, of €826 million in 2012. The main positive contributors to this profitability were interest and fee income of close to €1.4 billion and a net profit on loan and property disposals of €188 million. On the costs side, we incurred interest expense of close to €500 million on our debt, with administration costs of €119 million including two major elements of fees of €56 million paid to the banks to carry out loan servicing and €37 million in costs, mainly staff costs, reimbursed to the NTMA. I should point out that our costs are low by comparison with similar entities internationally. One indicator commonly used for asset resolution entities such as NAMA is the ratio of operating costs to cash generated, and for NAMA in 2012, this was 2.6%. Internationally, the ratio for similar entities has typically averaged 6% and in some cases has been as high as 12%. By comparison with our peers, therefore, we run an efficient operation and that is indeed appropriate given that we ultimately work to a mandate from the taxpayer.
Our profit for 2012 after tax and impairment was €228 million, reflecting an impairment charge of €518 million. This brought our cumulative impairment provision to €3.3 billion by the end of 2012. I wish that I could report that there will be no further impairment but, unfortunately, in a portfolio as diverse in asset class and geographically as NAMA's, that is not the case. Over the coming days, we will be submitting to the Minister for Finance our results for the first half of 2013 and, while I cannot disclose the specifics now, I am happy to report NAMA made a profit in the first half of this year.
In terms of assessing impairment, we go through a rigorous review which tests the robustness of the cash flows that we expect our portfolio to generate all the way to 2020. We look at expected disposal proceeds and the income projections for assets and we ask hard questions about whether they remain realistic. These disposal projections evolve over time, as harder market information comes to light about particular assets or market segments. Our impairment process involves taking a detailed look at cash projections for about 85% of our loan portfolio and making an assessment for the entire duration of the loan, which is to 2020 in many instances. This contrasts with the approach that we understand is typically adopted by banks internationally, which involves a detailed review of approximately 25% of the projected loan cash flows. We also take a very conservative approach to recognising projected gains and losses, as losses are recognised immediately whereas gains are not recognised until they are realised in cash.
As members know, the Government decided earlier this year to appoint special liquidators to IBRC with a mandate to arrange for the valuation and sale of the IBRC loan portfolio. As part of that decision, NAMA has been asked to acquire any loans not sold by the special liquidators, and this acquisition is likely to happen late this year or early in 2014. Our working assumption is that we will acquire a substantial proportion of the IBRC loans and we are making our preparations on that basis. We have, as yet, limited visibility on what we may acquire and, for that reason, it would be unwise of me to speculate too much on the strategies we might adopt or the time horizon over which we might expect to manage out the portfolio.
What is abundantly clear at this stage is that this new portfolio will present a major challenge for NAMA. Potentially, we could be acquiring a portfolio of commercial loans with par balances totalling €20 billion. Operationally, it is likely that we will manage the larger debtor connections directly, as we do with the existing portfolio. The smaller IBRC debtors - of which there could be up to 2,400 - will be managed on a day-to-day basis by a service provider acting under delegated authority from us. To put this into context, we currently deal, either directly or through the participating institutions, with approximately 800 debtors. If the bulk of the IBRC portfolio transfers to us, the number of commercial debtors being managed by NAMA, directly or indirectly, could increase from 800 to over 3,000. That does not include over 13,000 mortgage holders whose loans - aggregating to par debt of €1.8 billion - may also transfer to us if the residential portfolio is not sold by the liquidators.
We expect we will need to recruit between 180 and 220 additional staff directly in NAMA to provide a range of services relating to the new IBRC portfolio if we end up acquiring the bulk of it. Such recruitment would be challenging enough at the best of times but faced with public pay restrictions, it becomes much more so. Already this year, NAMA has lost 28 members of staff, over 10% of our headcount, on top of the 22 staff that left in 2012. With each departure, there is a loss also of business knowledge, continuity and of momentum. In all probability, the exodus will continue as the market improves and the high quality people in NAMA are targeted by entities such as banks, property firms and private equity funds.
I very much understand the rationale for the reductions in public sector pay and the need to ensure that no sector is left unaffected by the burden of adjustment. Moreover, a certain level of staff turnover is to be expected as the property market recovers and this is particularly so in an agency with a finite lifespan. Nevertheless, the reality is that NAMA is still continuing to expand due to the liquidation of IBRC and the portfolio under our management may well increase by up to 50% over the coming months, potentially by approximately €12 billion. NAMA is also a commercial organisation which must operate on behalf of the taxpayer in the international arena. Against that background, it faces potentially serious consequences arising from the scale of staff turnover and the quality and experience of the departing staff.
Four years ago, the Legislature set NAMA a challenging commercial mandate. I hope members consider that we addressed our mandate with vigour, realism and commercial dexterity. The various milestones reached to date in terms of cash generation and debt repayment could not have been achieved without the very able staff we were fortunate to recruit. Our difficulty now is that we are losing many able and talented people and we are facing an uphill battle in retaining others. Replacing specialist staff is difficult and we cannot press-gang property, banking and other specialists into joining NAMA or force them to stay if better opportunities arise elsewhere.
NAMA is an enormous undertaking for the State and we have proved that we can deliver on our commercial mandate in what has been a very tough economic environment, both domestically and globally. The commitment and resolve of the board and staff to contribute to a resolution of Ireland's difficulties is beyond doubt and I must pay tribute to them. I assure the committee that we will continue to do our very best for the citizens of the State.
I have addressed some of the key issues relating to NAMA as I see them at this stage of our evolution. The chairman, Frank Daly, and I are happy to discuss any issues the committee wishes to raise with us.
10:40 am
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Thank you, Mr. McDonagh. May we publish your statement?
Eoghan Murphy (Dublin South East, Fine Gael)
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I thank Mr. McDonagh, Mr. Daly and their colleagues for attending today. In my first questions I will look at the general figures, given that 2013 is a milestone year for NAMA. My colleagues will ask about some of the more detailed aspects of the 2012 report as well. NAMA will hit the first repayment target this year of 25% of the loan repayments. That is estimated at €7.5 billion. That was estimated at €8.1 billion in the original repayment schedule. Is that correct?
Eoghan Murphy (Dublin South East, Fine Gael)
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Did NAMA change the repayment schedule as a result in terms of the percentages it wanted to pay?
Eoghan Murphy (Dublin South East, Fine Gael)
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The original schedule is 40% in 2015, but today Mr. McDonagh spoke about 50% by 2016.
Eoghan Murphy (Dublin South East, Fine Gael)
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Is the 50% by 2016 a revision of the original schedule for repayment?
Mr. Brendan McDonagh:
The board reviews the strategic plan each year in light of market conditions and looks at what can be realistically achieved in the timeframe. Back in 2010 everybody was predicting that by 2012 and 2013, based on official figures from the Central Bank and the Department of Finance, the economy would be growing at 2.5% to 3%. That has not happened, so the board must take account of market conditions.
Eoghan Murphy (Dublin South East, Fine Gael)
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The NAMA projections, as recently as last year, were also for growth of 2% in the economy. Is that correct?
Mr. Brendan McDonagh:
Yes, over time. We just go with official forecasts and we adopt the strategic plan in the context of what the economy is doing. This time last year, I would not have been very confident about the Irish market in terms of how quickly it could recover. However, we have seen the amount of transactions that have taken place in the first eight months of this year and the build up in 2012 over 2011. That has certainly been very welcome in terms of activity and interest in the Irish market as the Irish recovery story occurs and, in fairness, due to the job that has been done by everybody, including the Government in sticking to its fiscal targets.
Eoghan Murphy (Dublin South East, Fine Gael)
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Is Mr. McDonagh more confident now than he was this time last year?
Eoghan Murphy (Dublin South East, Fine Gael)
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That is despite the fact that our growth projections are not as optimistic as they were previously?
Mr. Brendan McDonagh:
The big issue here is that the two main banks had deleveraging targets to meet. Until they met those targets, they would be constrained in lending. That is the reality. They both met their deleveraging targets. Bank of Ireland met it earlier this year and it was announced earlier this week that AIB had met its deleveraging target. As we move forward one will see them probably becoming more active lenders into the market. Also, the big difference between early last year and now is that more international players are prepared to bring either real money into the country or to lend it. International banks are prepared to lend into the Irish market to fund people to buy property. That was not the case early last year.
Eoghan Murphy (Dublin South East, Fine Gael)
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Is Mr. McDonagh confident about that repayment schedule even if the economy does not grow at an average of 2% per year over the next few years?
Mr. Brendan McDonagh:
It would be better, obviously, if the economy grows. However, I am basing it on what is happening at present and the continued interest in the Irish property market. As I said, the market is not homogenous. We are fortunate with the NAMA portfolio in that 93% of it is in Dublin, Cork, Limerick and Galway. Of that 93%, 67% is in Dublin, 10% is in the commuter belt, 10% is in Cork, 4% is in Galway and 2% is in Limerick. Our assets are in those major cities. Only 7% of our assets in Ireland are outside them, which amounts to approximately €850 million. That €850 million is quite small in the context of our current loan book. If that takes much longer to recover, it will not hold back NAMA in meeting its potential. We have been very fortunate, unlike other asset management companies in other countries, that from the start 44% of our portfolio was outside of Ireland. It allowed us to generate a great deal of activity to give us a chance to hold back on the Irish market and let that market recover.
Eoghan Murphy (Dublin South East, Fine Gael)
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I will return to the detail of the portfolio. We face a 50% repayment by 2016 and 80% by 2017.
Eoghan Murphy (Dublin South East, Fine Gael)
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In the schedule I have it is 2017, with 95% in 2018.
Mr. Brendan McDonagh:
That was based on a business plan the board published a long time ago. The board looks at its business plan every year. The contingent liability of the State started at €30 billion. That was the Government-guaranteed debt. We will have €15 billion paid off by 2016 and the full €30 billion will be paid off by 2020.
Eoghan Murphy (Dublin South East, Fine Gael)
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Even if it is 80% by 2018, it is a leap. It is a lot to achieve in two years - it is 30% in two years versus 50% in six years.
Eoghan Murphy (Dublin South East, Fine Gael)
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If we look at the first 25%, and I will return to that in detail, the bulk of it has come from overseas. However, that 30% in two years will have to come almost exclusively from the Irish market.
Mr. Brendan McDonagh:
Yes, but as I said we are very fortunate in terms of where our assets are located in Ireland. They are urban locations. The fact that 67% of them are in Dublin and 10% are in the commuter belt means one would be more confident, given where the activity and population are in the Irish market, that they are better places to have them.
Eoghan Murphy (Dublin South East, Fine Gael)
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It is still a huge disposal on the market even in a two-year period. It has an impact on the market.
Mr. Brendan McDonagh:
I am the first to agree with the Deputy on that. However, that is the portfolio we have. I am much happier to be able to say today that 93% of our portfolio is urban located rather than 50% of it being urban located, because it would be a much more difficult target to achieve if the portfolio was constituted that way.
Eoghan Murphy (Dublin South East, Fine Gael)
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When the board creates these management plans and revises repayment schedules, does it need approval from the Minister or can it do that independently?
Mr. Brendan McDonagh:
Under section 18 of the NAMA Act the board is responsible for setting its strategy. Clearly, the chairman and I keep the Minister fully informed of what the board's thinking is.
Eoghan Murphy (Dublin South East, Fine Gael)
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Must he approve that strategy?
Eoghan Murphy (Dublin South East, Fine Gael)
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Turning to the €7.5 billion figure for the end of this year, which is the 25%, will Mr. McDonagh give a breakdown of that in respect of commercial versus residential?
Eoghan Murphy (Dublin South East, Fine Gael)
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What about in terms of the overseas market versus the Irish market?
Eoghan Murphy (Dublin South East, Fine Gael)
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When Mr. McDonagh appeared before the committee a year ago he spoke about a change in the portfolio in terms of estimated valuation. He spoke about the overseas market being up 10% while the Irish market was down 20%. Does he still estimate that the Irish market is down 20%?
Mr. Brendan McDonagh:
Yes. The market is what it is. We have looked at the activity to date and where the market is. On a blended basis between the Irish market being down 25% from the time we bought them and some very big successes in the overseas markets, particularly in London, we are ahead by approximately 11%.
Eoghan Murphy (Dublin South East, Fine Gael)
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The blended basis takes into account the decrease in the Irish market.
10:50 am
Eoghan Murphy (Dublin South East, Fine Gael)
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Is Mr. McDonagh talking in terms of sales?
Eoghan Murphy (Dublin South East, Fine Gael)
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That is different from what we get in terms of the value on the books, which is probably a bit more important in the longer term.
Eoghan Murphy (Dublin South East, Fine Gael)
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We have realised the bulk of that 25% of the first bond repayment through UK sales. That is an increase on our valuation of them when we first took over the loans. Is that correct? Is it about 10% or are they overseas?
Eoghan Murphy (Dublin South East, Fine Gael)
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Has the bulk of that 25% come from the overseas market?
Eoghan Murphy (Dublin South East, Fine Gael)
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And the overseas market is about 10%.
Mr. Brendan McDonagh:
There is also an important constituent. Out of the more than €13.5 billion income that we have generated to date, €4.5 billion has come from rental income, and that is coming on the portfolio. There has been €9 billion of sales and the bulk of those have been in overseas markets, London in particular.
Eoghan Murphy (Dublin South East, Fine Gael)
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The Irish portion is still down 20% on what was paid in November 2009. When we look ahead to next repayment target, the bulk of the first 25% came from overseas, and that was up, while with the next 25%, we cannot dip into the overseas market to achieve the target and the Irish market is down.
Mr. Brendan McDonagh:
Yes, but as of 30 June of this year, we still have €9 billion of overseas assets remaining in the NAMA portfolio and about €12 billion of assets remaining in Ireland. We have taken substantial impairments. The majority of the impairment figure to 1 December of €3.3 billion that the board has recognised to date and which has been signed off by the Comptroller and Auditor General as being appropriate has been against Irish assets.
Eoghan Murphy (Dublin South East, Fine Gael)
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Those impairments are against Irish assets.
Eoghan Murphy (Dublin South East, Fine Gael)
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But those impairments increase each year.
Mr. Brendan McDonagh:
Yes. The impairment exercise is as much a mathematical exercise as anything. One puts all of the cashflows in and discounts them back using - I do not want to get technical - what the International Financial Reporting Standards, IFRS, call an "effective interest rate". The effective interest rate for a NAMA portfolio is, on average, about 5%. One accrues income and discounts it back. One also accrues an income on assets which are not income generating, like land, and 5% is discounted back. Depending on when one is going to put it up for sale, and purely as a mathematical exercise, if one is going to put it up for sale in 2013 or 2016, that would have an effect on what the impairment figure is going to be and the discounted value versus carrying value. That is how one calculates one's impairments.
Eoghan Murphy (Dublin South East, Fine Gael)
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When Mr. McDonagh looks forward to 2015 and the next repayment, by which time we are meant to achieve a further 15%, and we are looking at overseas assets of €9 billion and assets in Ireland of €12 billion, is NAMA planning to achieve that 15% by releasing the majority of overseas assets, as was done with the first 25%?
Mr. Brendan McDonagh:
No. Now we are beginning to see much more interest in the Irish market. In 2009, there was only €97 million worth of activity in the Irish property market. In 2010, it was about €200 million. In 2011, it was something similar. In 2012, it was about €550 million. Already this year, the Irish commercial property market is worth in excess of €1 billion.
As I said in my speech, we sell into the market on the basis of what the market can absorb. If one is going to put more onto the market than it can absorb then, in effect, one is going to give away the portfolio for nothing. That is not NAMA's objective or its commercial or statutory remit. It is to have an orderly and phased disposal of the assets and to sell them at prices that are realistic and captures their intrinsic value.
Eoghan Murphy (Dublin South East, Fine Gael)
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This comes back to what I was trying to get at earlier. To get the 15% figure by 2016, NAMA will be getting rid of most of the overseas assets.
Mr. Brendan McDonagh:
The board has had a very deliberate strategy since it started off in its first strategic plan in 2010 as saying we will sell the overseas markets because those markets are very buoyant with a lot of buyers. If one looks at where NAMA's overseas assets remain, about €7 billion of the €9 billion in overseas assets are in the UK, primarily in London and the south east, and about €2 billion of the overseas assets are in three other locations by value: Germany, France and the US. They are places where there is liquidity and activity so one can get those assets sold. It has been very deliberate on the part of the board of NAMA strategy to say that we will sell the overseas assets, asset manage the Irish assets, take the income earned on the Irish assets and sell them at the appropriate time.
If one thinks about it in terms of this, and this is really just common sense, if one has income-producing Irish assets that are giving an income of 8% to 9% per annum, and that was up until the start of this year, and now the yield from those assets has contracted and is coming down more towards 7%, which means that the price of the assets has risen, one is better off to take the income, wait for the yields to contract and sell them at a realistic level. That is what this is about.
Mr. Frank Daly:
On the other point, if I may, in relation to where the next 25% will come from, it is not just the fact we have sold so much of the overseas assets, we have got a very good return from those sales which in turn is enabling us to invest in our Irish assets, so that by the time we put them on the market, they will be much more valuable. That is where the blend will come from in the next 25%. It is the market itself improving, investor interest increasing, but it is also the wherewithal we have, coming largely from the UK, to invest in our Irish assets, so that by the time the assets come for sale, they will be much more valuable. All of that will contribute to the 25%. As the CEO has mentioned, the location of our assets in Ireland is very important.
Eoghan Murphy (Dublin South East, Fine Gael)
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I understand the next 25%, but it is more that I am thinking beyond that to the 30% over the two year period. If we have achieved 50% of our bond repayments on NAMA through the bulk being overseas sales, and that at an increase above the value at which we purchased them, which is good, but then relying almost wholly on the Irish market over a two year period to realise 30% on NAMA bonds, and I understand the point on rental income, do we really think that the income being generated from those assets will be sufficient over a two year period, combined with the recovery in those asset prices in that period? We are talking about a significant jump, despite what investments might be made.
Mr. Frank Daly:
One is also talking about the investments that we will make between now and 2016 or wherever which certainly will give us a yield beyond that. In saying today that we are confident that we will repay all our senior debt by 2020, we have done that on the basis of a very detailed look at projections right out to 2020 in respect of every one of our NAMA managed debtors. It is not a theoretical exercise or anything like that. It is a very hard look at cashflows, sales projections and the timing of those right out to 2020.
Eoghan Murphy (Dublin South East, Fine Gael)
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In relation to that, NAMA's debtors and what has been achieved to date, has that been achieved solely through debtors who are working with NAMA?
Mr. Brendan McDonagh:
No. In fact, of the €9 billion in assets we have sold to date, €1.2 billion of that has come from assets where we appointed receivers or receivers were already appointed by the time we inherited the portfolio from the banks. The majority of it has come from debtors who are working with us.
Eoghan Murphy (Dublin South East, Fine Gael)
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I think Mr. McDonagh said previously that only two thirds of debtors were working with the agency.
Mr. Brendan McDonagh:
Yes. By value, it is well over 70%. By number, it is probably now down to about 55%. In terms of the way that we manage the portfolio, NAMA has 800 debtors, the top 190 of whom are managed directly by NAMA, and the other 600 of whom are managed by the participating institutions, if one assumes that the IBRC was still in place. We are now finding that a lot of those smaller debtors, because they effectively got involved in the speculative buying of land and were not really developers, are consenting to receivership. They no longer want to deal with the assets because the land is never going to be developed, and things like that. One is finding is that a lot with the smaller sized debtors. That is why there has been a decline in number, but if one looks by value, over 70% by value are working consensually with NAMA, which are mainly the NAMA-managed ones.
11:00 am
Eoghan Murphy (Dublin South East, Fine Gael)
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If the bulk of the assets that NAMA has disposed of belonged to people working with the agency, then the ones left will be more difficult to deal with. It will be a harder task for the agency because these people are not willing to comply or work with NAMA.
Mr. Brendan McDonagh:
NAMA is a diverse portfolio. There are over 12,000 loans and 55,000 individual saleable property units in the portfolio. That is what we inherited. Over time, we are looking over the 55,000 units and trying to identify the ones that are better to sell now, if there is an opportunity to sell as part of the whole business plan process, and the ones that are better to manage as assets. Maybe there is an opportunity to put some capital in to build on a site that has planning permission and sell the complete product. This is a complex business. We are not just looking at one debtor and deciding to work with that debtor until the end; we have 800 debtors to look at every single day to try to figure out how to meet our cash flow targets every year.
I appear before the troika every quarter and every time the troika tells me that it wants me to repay the NAMA bonds as quickly as possible and sell the portfolio as quickly as possible. We must reply to the troika, as we do to members, that this must be done in an orderly and phased way to realise the maximum value of the portfolio so that the taxpayer is not faced with another hole. If we do not generate enough cash to get rid of the contingent liability of the State, the Government has guaranteed NAMA bonds and must make up the difference. Our job is to make sure the contingent liability is not realised. As the chairman said, and as I said, we rigorously look at cash flow, the value of the assets and the market segments at points in time. It is not static and things change from month to month. Overall, we are very confident that by 2020 we will have realised enough cash to pay off the senior debt on the portfolio.
Deputy Murphy is correct in that I expect there will be a rump of assets left at the end of NAMA's work in 2020. They may not be sold by that date but we think we will have generated enough rental income on the assets to make up for the rump of assets left. The rump of assets that may be left is potentially the €900 million worth of assets outside the main urban centres in Ireland. It is not a big problem.
Eoghan Murphy (Dublin South East, Fine Gael)
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When we look to 2020, is Mr. McDonagh anticipating having loans or assets in NAMA but with the bonds all having been repaid?
Mr. Brendan McDonagh:
Yes, we expect to generate enough cash and we will not be surprised if there is a small rump of assets left. NAMA does not have to continue to exist. If it is only land, the Government has other mechanisms to give it to local authorities or to the OPW. Our objective is to sell down everything but NAMA is a complex infrastructure and we will not need it forever, as the Minister said last week.
Eoghan Murphy (Dublin South East, Fine Gael)
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Did Mr. McDonagh refer to €9 million in terms of the assets outside of the commuter belts?
Eoghan Murphy (Dublin South East, Fine Gael)
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Is Mr. McDonagh expecting an operating profit of just under €1 billion after 2020?
Mr. Brendan McDonagh:
In the 2010 business plan, the board referred to three scenarios. The central scenario was expecting close to €1 billion in profit but that assumes reasonable growth in 2011, 2012 and 2013. The board is now saying that we expect it to be closer to breaking even. If we repay all the senior debt, that is, the contingent liability of the State, what remains is the sub-debt that NAMA issued to the banks, some €1.5 billion. It depends on the assets that remain to meet that.
Eoghan Murphy (Dublin South East, Fine Gael)
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Is Mr. McDonagh balancing the €900 million against the €1.5 billion to the banks?
Eoghan Murphy (Dublin South East, Fine Gael)
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Mr. McDonagh expected better growth figures for the past three years but it did not happen. Is that why the revision was made?
Eoghan Murphy (Dublin South East, Fine Gael)
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I am somewhat confused by the concept of long-term economic value. We purchased the loans on 30 November 2009 at market value.
Mr. Brendan McDonagh:
Long-term economic value was the European concept. A very good report was produced by the Comptroller and Auditor General in terms of the acquisition and its key point, which not everyone is aware of, is that while the banks got the long-term economic value, the value we paid the banks for the loans was equal to the current market value of the properties in 2009. We took the value of the property in 2009, added the long-term economic value based on a European formula and then put it into a cash flow model and discounted it. By discounting over a number of years, we eliminated the long-term economic value. This is detailed in our 2011 annual report as well as in the report of the Comptroller and Auditor General. It means that the value the banks received was equal to the current market value of the property as of 30 November 2009.
Eoghan Murphy (Dublin South East, Fine Gael)
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Did we acquire loans that seemed to be worth €31 billion?
Eoghan Murphy (Dublin South East, Fine Gael)
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Over the course of a ten-year period, we have managed the assets to realise the market value as of 2009.
Eoghan Murphy (Dublin South East, Fine Gael)
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Does anything above that qualify as profit?
Eoghan Murphy (Dublin South East, Fine Gael)
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Does this also take account of operating costs, fees to debtors, any investments made and money recouped?
Eoghan Murphy (Dublin South East, Fine Gael)
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Must NAMA make more than €31 billion in order to achieve a break-even target?
Eoghan Murphy (Dublin South East, Fine Gael)
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Is Mr. McDonagh estimating that at €32 billion?
Eoghan Murphy (Dublin South East, Fine Gael)
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Is that the estimate for 2019?
Eoghan Murphy (Dublin South East, Fine Gael)
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In his opening statement, Mr. McDonagh said that NAMA was established to achieve the best financial return for the State from the assets entrusted to it. However, the legislation does not exactly say that. The legislation is open to interpretation as to what exactly NAMA is meant to pursue above and beyond the value of the assets as it acquired them in 2009. Looking back to Mr. Brian Lenihan, he said that the amount the borrower owes will not change because of the transfer of the loan from the bank to NAMA. However, as we have heard on previous occasions when Mr. McDonagh has appeared before the Committee of Public Accounts, that view has changed in NAMA and Mr. McDonagh is looking to realise the assets as best he can over a ten-year period. This will become more important as debtors begin to work out Irish property in the market. A debtor who works with NAMA, makes the repayments and recovers the cost of the assets as they were purchased by NAMA in 2009, will be let off after a period of two years. The statement made by Mr. Brian Lenihan when the legislation was originally enacted is no longer the position. We have seen a bit of creep.
Mr. Brendan McDonagh:
The reality is that we bought €74 billion worth of loans from the banks and paid €32 billion to the banks for the loans. I would love to be able to say that the value of the underlying assets was €74 billion. The value was €32 billion when we bought them. What we are trying to realise is the €32 billion. We are pursuing each and every debtor for the maximum amount of money he or she can repay, either through selling the underlying assets, going after the debtor for unencumbered assets or reversing asset transfers.
In my statement earlier I said that, to date, we have taken €800 million from debtors which they had as unencumbered assets or had transferred to third parties. We forced them to give back those assets. We are doing asset searches on people and are asking them for sworn statements of affairs. We check that their statements of affairs are correct. I assure the Deputy that if debtors have more assets than they have declared to us, we will pursue them. While I do not want to refer to any specific case, NAMA is in the courts quite often pursuing people where we believe they may have assets other than those they have declared to us.
11:10 am
Eoghan Murphy (Dublin South East, Fine Gael)
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That is not the point I am making. I am not referring to any specific court case. I am referring to debtors who are working with the agency, doing their best to help NAMA realise the value of the loans when they were purchased in 2009. Some may do that and receive a salary, which is fair enough if they are the best people to manage the portfolio. They might also realise a profit if they bring back more than what the agency paid in 2009. Then, after a two-year period, they are off the hook.
Mr. Brendan McDonagh:
In reality, the NAMA board has to take a commercial view and determine how best to maximise the return on any portfolio. One could take the view that we should get rid of every single debtor, appoint a slew of receivers and get them to manage the assets but we do not believe that is the best way to work. Sometimes we have to cough hard and accept that the best approach is to work with debtors on a consensual basis and help them to realise the maximum value of the assets. We must make sure they have given up all of their personal assets and then, in return for working with us over a period of time, we may enter into a commercial deal with them to the effect that once all of the assets are sold and there is nothing left, the difference is written off. The reality is that this is not inconsistent with the personal insolvency legislation under which a debtor can declare bankruptcy, which some of our debtors have done, and effectively all one is left with then is the charge over the assets and there is no further recourse to the individual concerned. Of course, there are also debtors in our portfolio who have borrowed through special purpose vehicles and therefore we have no personal recourse. All we have is recourse to their assets.
Eoghan Murphy (Dublin South East, Fine Gael)
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It is not entirely consistent. The personal insolvency scheme and the NAMA scheme are not necessarily comparable, as I would see it. However, I understand the point Mr. McDonagh is making.
Mr. Brendan McDonagh:
The insolvency regime in Ireland, whereby those declared bankrupt remained so for 12 years, has been changed by the Government and the timeframe has now been reduced to three years. The option is always there for people who have completely over-borrowed to seek bankruptcy in Ireland or, as in the case of many of the major debtors here, in Britain or elsewhere. In some other jurisdictions, one can be out of the bankruptcy process after one year.
Eoghan Murphy (Dublin South East, Fine Gael)
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It is taking the debtors working with NAMA three to five years to work through, is that correct?
Eoghan Murphy (Dublin South East, Fine Gael)
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They work through their loan book but they are not bankrupt at the end of it.
Mr. Brendan McDonagh:
No. We look at what is left at the end of the process and the reality is that they would have very little left. A lot of these people got caught up in the whole thing. They borrowed huge amounts of money. They accept they made a huge error, got caught in an asset bubble, over-borrowed and over-paid for assets. They basically want to find a resolution because a lot of them would have families and children. They want to make a contribution towards the recovery of the Irish economy by getting the most back for NAMA. That said, it must be a commercial arrangement because we are a commercial business. This is not a business which has a huge amount of empathy for people, to be honest. We have to look at this from a commercial perspective and work out what will generate the best return for the taxpayer. We want to get rid of the contingent liability hanging over the taxpayer at present.
Eoghan Murphy (Dublin South East, Fine Gael)
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I will finish there but would like to come back in later, time permitting.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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That is fine.
Derek Nolan (Galway West, Labour)
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I welcome Mr. McDonagh and his officials. To pick up on his final point, the contrast between the situation for those operating under the personal insolvency regime and those working on a commercial basis with NAMA is that under the former regime, there are very strict limits on what people can spend and the lifestyle they can lead is very tight, whereas in the case of three people working with NAMA, they are earning over €200,000 a year. To compare the NAMA system with the personal insolvency regime and say they are similar is pushing it, in my view.
I wish to ask about the issue of NAMA staff, which has come up in the press quite frequently lately. Mr. McDonagh mentioned the fact that NAMA lost a lot of staff this year and last year. I was going to ask how many staff were lost in 2013, but Mr. McDonagh gave us the figure for two years. A total of 50 staff have been lost, which equates to one quarter of the staff. How is NAMA coping with the loss of talent every year and is it impacting on business operations?
Mr. Brendan McDonagh:
It is impacting on our business operations, as I said in my opening statement. We recruited a lot of these people in 2010 and 2011 when the banks and property firms were letting a lot of people go. As the economy improves, obviously opportunities arise for these people. We are doing our best to retain people and to recruit people to fill the gaps. One of the things we are doing now is promoting those we recruited initially at a junior level who now have one or two year's experience to fill the positions of those who leave. It is not easy but we must accept the environment we are in. We are doing our best to manage it. In reality, if someone is very good and is highly skilled, he or she will have opportunities elsewhere. People are people and if they are in their mid-30s, with a family and a mortgage, they know that the lifespan of NAMA is finite, ending in 2020. If they get a job offer from somewhere that will see them working beyond 2020, then they will accept that offer to give themselves longer-term security.
Derek Nolan (Galway West, Labour)
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I accept that out of the 50, there would always have been some who would have left anyway, for family or personal reasons, for example ---
Derek Nolan (Galway West, Labour)
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Where are most of the former employees going? The Irish banking market is shrinking. People in AIB are being given voluntary redundancy, as are staff in Bank of Ireland. There does not seem to be very many job opportunities in the Irish banking sector. Are NAMA employees going abroad?
Mr. Brendan McDonagh:
No, for the type of people we employ, particularly in the areas of asset management and asset recovery, there are lots of job opportunities. Some of the main banks here are gearing up to deal with distressed mortgages and other items on their loan books and people who have worked in NAMA, having spent three years managing debtors and dealing with distressed assets, are being targeted. There are also a number of international property and private equity firms coming into Ireland with the intention of buying assets and they are also recruiting people. Some people have moved to London too. A number of those would have come over from the UK when we recruited them and have now moved back to London. There are also some Irish people who have chosen to move to London. One of my senior financial staff has just been offered a job in Washington with the IMF. That goes to show how far our staff can travel.
Derek Nolan (Galway West, Labour)
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One of the issues that has featured in media reports that many people are talking about is the number of people who are leaving NAMA to work for private equity and property investment companies which are investing in the Irish market. There is a perceived conflict of interest in people leaving an organisation which manages one of the largest property portfolios in the world to go to work for private companies with which they may have had dealings in the past. What is Mr. McDonagh's view on that? It seems to me that the people who are working for NAMA have a huge amount of knowledge. As Mr. Daly said, NAMA has prepared, until 2020, an analysis of how its portfolio will be disposed of, how it expects its cash flows to pan out and how each of the 800 debtors will be dealt with.
It has built a base case in that respect. Senior people in the organisation have a very good knowledge of how NAMA will operate until it closes in 2020. Therefore, they have a large level of knowledge of the future development of the Irish property market. When they leave to work with people who are investing in the Irish property market, is there a conflict of interest? Are they being hired because they are working for NAMA and have insider information?
11:20 am
Mr. Brendan McDonagh:
I remind the Deputy that they would not have been working for NAMA in the first place of they did not have the skills we needed. They might not have had the same level of knowledge when they were recruited. We have strategies for dealing with our 800 debtors until the time comes when all of them are ultimately realised. Very few people have access to information with a high level of detail. Having said that, people who are employed by the NTMA and assigned to NAMA are obliged to comply with the Official Secrets Acts. Their obligations under section 202 are of lifelong application - they are not confined to the duration of one's work with NAMA.
There are two aspects to the answer I will give to Deputy Nolan's question, which I was also asked at the launch of our annual report. The best way of ensuring no one can steal a march on anybody else is to ensure all the assets are openly marketed, in so far as practicable. If a particular legal issue arose, that would probably be the only exception. This approach means that everybody has the same access to the same information. When the Minister was asked the same question at the launch of our annual report at the end of May, he said he encourages the movement of people between the public and private sectors because it generates new ideas in the public sector. He also said it promotes a better understanding of the public sector on the part of the private sector. The reality is that people who work in NAMA have to give three months' notice when they resign. We have the option of putting them on gardening leave for that period. The reality is that we cannot stop someone from making a living. If we think somebody is using information inappropriately, there are mechanisms to deal with that under the present legislation.
Derek Nolan (Galway West, Labour)
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Mr. McDonagh does not believe there is an issue at the moment with staff leaving. He does not believe anything needs to be done to tighten up on compliance contracts, etc.
Mr. Brendan McDonagh:
The three-month period applies to people who have worked in NAMA from the very start. The NTMA, which is the employer, recently reviewed employment contracts. After taking legal advice, it decided to extend that period to six months in the cases of new people and people who are being promoted into senior positions. There is a certain period of time for which one can restrain people in this way. If one puts them on gardening leave, one has to pay them for that period. I accept that there is an issue with the impact on the organisation of people leaving. Enough sanctions are already in place, including the confidentiality provisions under section 202 of the NAMA Act, the provisions of everybody's employment contracts and the obligation to comply with the Official Secrets Acts, to ensure we have a mechanism for dealing with people. I regard the people who work in NAMA as professional. They are recruited for their expertise, rather than their specific knowledge of individual assets. One way to ensure they cannot benefit from their specific knowledge of individual assets is to ensure the assets that go up for sale are openly marketed. If everybody can see them, nobody has exclusive information.
Derek Nolan (Galway West, Labour)
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The rough plan to which I referred is the strategy for the disposal of assets between now and 2020, which relates to debtors and cashflow projections. Would any of those who have left NAMA have been in possession of that information?
Mr. Brendan McDonagh:
No. Very few people have that information. It is the board's strategic plan. The people with access to that information would be the members of the board and the senior executive team. Just one member of the senior executive team has left NAMA since its inception. He left at the end of 2011 or the start of 2012.
Derek Nolan (Galway West, Labour)
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Did that person go to work for a property investment company?
Derek Nolan (Galway West, Labour)
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I would like to ask about the impairment of €3.3 billion that NAMA has on its property. Mr. McDonagh explained that some of it is quite technical and relates to year-on-year interest calculations that are based on assets that are not generating income, etc. Surely some of it must relate to a simple revaluation of the portfolio based on current market value. Could Mr. McDonagh split the €3.3 billion between the two categories - that accounted for by technical calculations and that accounted for by the actual degrading of the portfolio?
Mr. Brendan McDonagh:
It is very difficult for me to give the Deputy that information here today. It is a comprehensive exercise. It is not based on one particular element. One looks at one's assets at the end of each reporting period and at the planned timeline for their disposal. One might have said at the end of 2012 that one would dispose of an asset in 2014, but when one looks at it now one might decide to dispose of it in 2015 instead. That can cause a technical movement. In addition, one might have predicted that one would get €10 million for an asset that one was disposing of, but one might now predict that one will get €11 million for it because the market has improved. In such circumstances, the updated valuation would be included. As I said at the outset, we undertake this form of individual analysis for 85% - by value - of our portfolio. We believe that internationally, banks undertake this exercise for just 25% of their portfolios.
Derek Nolan (Galway West, Labour)
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I would like to tease out the €3.3 billion figure because I want to understand it. As it accounts for almost 10% of the value of the portfolio - €3.3 billion is 8% or 9% of €34 billion - it is quite a significant figure. How much of an impairment had NAMA projected into its base case in 2010 when NAMA was set up?
Mr. Brendan McDonagh:
In 2010, we did not project any impairment because we expected to get back the value of what we paid for the assets. As I said to Deputy Murphy, in the base case scenario we were expecting or projecting to get a profit of approximately €1 billion after we sold the assets, paid off the debts and paid off all our costs. I suppose the difference between 2010 and now is that while we have taken an impairment, we have also been able to generate more income on the portfolio than we thought we would in 2010. When we inherited the portfolio from the banks in 2010 and 2011, approximately 20% of the rental income that was coming in on the properties was mandated to the banks. The debtor was collecting the money, but whether he was paying off the interest or the capital is another thing. Under NAMA, we have captured all the income of the debtor as part of his or her work with us or through receivers. As a result, over 95% of that income is coming directly to NAMA. The rental income is much stronger than we predicted in 2010. That compensates for the decline in value, which is reflective of the market conditions. As I have said, the majority of the €3.3 billion has been against the Irish assets. This reflects the decline in the asset values in the Irish market.
Derek Nolan (Galway West, Labour)
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That goes back to the point I was trying to make. NAMA did the initial assessment of the loans, before it took them over in 2010, in order to calculate the discount. Is that right?
Derek Nolan (Galway West, Labour)
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NAMA did the analysis. It decided the loans were worth a certain amount. It did the long-term economic value tests and so on.
Mr. Brendan McDonagh:
As I said to the Deputy, the value we paid the banks was equal to the value of the underlying property. Each of the individual properties or securities for loans was valued by a property valuer for the banks. We got our own property valuers to say whether we agreed with that value. If we agreed with it, we accepted it. If we did not, we rejected it and got a new evaluation. That was done by reference to 30 November 2009. However, the market values have declined. If one studies any of the indices - the IPD is an internationally well-recognised index - one will see a reflection of the fact that there was a fall in asset values of 25%, on average, between the end of 2009 and the end of 2012. That is the market we have to deal with. That is the reality the board has to face at the end of each financial year.
At the end of each financial year, when it is preparing its accounts and submitting them to the Comptroller and Auditor General for audit, the board must face the question of whether the impairment exercise is robust and reflects the reality of what we will recover on these assets between now and 2020.
11:30 am
Derek Nolan (Galway West, Labour)
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While I accept that point, the issue is that the impairment value is based on a judgment made by NAMA in 2009 and 2010. The agency is revising its own estimates.
Mr. Brendan McDonagh:
No, the impairment value was based on independent professional advice. The valuations had to be approved and are subject to audit by the European Commission which has looked at all of the valuations to see if they were correct. If they were not, there would be a state aid issue. There is, therefore, a huge exercise under way in looking at every single property that was valued and independently audited to make sure the value of the assets was correct as of 30 November 2009. The valuations were not only NAMA's view but were independently verified for state aid purposes by the European Commission.
Derek Nolan (Galway West, Labour)
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On the base case, it was intended to realise an initial profit of €1 billion. It is now more likely that NAMA will break even. Given the decline of 25% in the market value of NAMA's Irish portfolio, the agency must make up lost revenue if it is to reach a break-even position. How is the gap being bridged? Surely it will be greater than €1 billion.
Derek Nolan (Galway West, Labour)
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Was NAMA's projection that it would receive €2 billion in rental income based on a figure of 25% in terms of paying rent?
Mr. Brendan McDonagh:
As I have stated previously, when we inherited a portfolio from the banks, there was no hand-over of information to us. The banks had very little information to give to us on the portfolio and we had to make a conservative projection of how much income we would receive from the assets. Thankfully, as it turned out, the assets were better located geographically. In addition, they were producing much more income than the banks had probably realised. The reason was that debtors were pocketing the income and not passing it over to the banks. As part of our detailed business plan exercise which started in 2010 and finished in early 2012, as the Comptroller and Auditor General noted, we looked at every single asset and asked whether it was income producing and, if so, where the income was going. We told debtors that if they wanted to work with NAMA, they had to mandate that income to NAMA and that if they would not do so voluntarily and were in default, we would have to appoint a receiver. The income from the assets, therefore, has been much stronger than we anticipated, based on the information available to us in early 2010.
Derek Nolan (Galway West, Labour)
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A bank dealing with a customer would examine the case made for a loan when it was provided and measure the loan against projections to see how the customer was doing. That is the issue I am trying to get at.
Mr. Brendan McDonagh:
The reality was that there were 55,000 individual properties in the NAMA portfolio. The information we received on loans was that a loan had been provided and was secured on a particular property. We were not given any indication as to whether the property was, by and large, income producing. Sometimes the income might have been low because the asset had been provided rent-free for a period, which is common, or the debtor had not told the bank that it was generating as much income as it was. We had to systematically go through an exercise to identify how much income individual properties were producing and where this income was going. We then had to ensure it was mandated to us. This is not an easy exercise.
Mr. Frank Daly:
The key issue the Deputy raises concerns the base case in 2010 versus where we are now and where we will be in 2020. There is also the issue of the mandating of income and the good management of and investment in the assets. The main factor that has made the difference between the €1 billion profit projection we made at the time of the base case and the current position where we believe we will repay all our senior debt is the way the market has changed. There was a 25% change in the market between 2009 and 2013 which we could not have forecasted. I do not believe anybody forecasted it and if one listens back to what was said at the beginning of that period, the view was optimistic. I would also like to be a little optimistic because if the market changed to such an extent during a downward spiral between 2009 and this year, it could also come back between now and 2020.
The board must be very realistic. We can only produce a strategic plan and make our projections based on what we know now. However, if there was a fair wind in the market between now and 2020, we could do more than just repay our senior debt. We could, for example, cover the sub-debt and perhaps return to a scenario where we would make a profit. We have to be realistic today, but we also have to acknowledge that, just as the market has gone down in recent years, it could also improve again in the coming years and bring us back to a more optimistic view.
From the Deputy's point of view - he is quite right to ask us about the difference between then and now - we are being realistic about what we see right now. The board must be realistic. Things could change, however, and we could come before the committee in two years to say the market had improved by 5% or whatever other figure, which would change the scenario. Every time we look at our strategic plan, engage in the exercise of impairment or make cashflow and disposal projections, we have to take account of what is happening in the market. We would be foolish if we were to write a strategic plan and develop a scenario and then decline to react to what was happening.
Derek Nolan (Galway West, Labour)
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Mr. Daly is getting to my point, namely, that the position has deteriorated since NAMA was established. The agency's projection that it would make a profit of €1 billion has changed to one where it expects to break even. Given that only one third of the NAMA project has been completed, I am worried that in one or two years the projection may change again to one of making a loss of €1 billion or €1.5 billion. I am trying to tease out with the witnesses how fragile the market is and the possibility that it could move in one direction or the other. The point I am trying to make is that the situation is volatile. When I asked representatives of NAMA about the base case at our previous meeting, they stated they were certain the agency would break even. I am trying to find out, in percentage terms, what is the risk that we will not break even but will instead make a loss.
Mr. Frank Daly:
There is no doubt that there is volatility. One could say we might have come before the committee today to express a much more pessimistic view were it not for the good management of NAMA assets in the past three years, from mandating the rents and investing to the sheer professional management of the assets. We have to take into account that we are in a somewhat volatile environment.
Our opening remarks and other recent statements point out that we are seeing good signs of stability in the market. These have been noted for several months and are not a phenomenon that has been noticed this month. There are signs of growth in certain areas of the commercial market. For example, there is a demand for prime Dublin space and huge investor interest because investors see Ireland as a good place in which to invest. In the residential space - the most challenged sector in the popular mind - there is resurgent demand in certain areas in Dublin. This is funding the building of houses in certain parts of Dublin and Cork. This comes as a surprise to people, but it is a reflection of current demand and a lack of supply in particular niche areas. The Deputy is right that the market is the market. To a certain extent, the way we manage our portfolio can help the market. If we had dumped assets or engaged in a fire sale in the past three years, the prediction would have been much gloomier. Just as the market went down in the past three years, it can also go up and it is definitely stabilising.
Derek Nolan (Galway West, Labour)
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On NAMA's portfolio disposal strategy, while the agency has a huge portfolio, it has been concentrating on the disposing of assets abroad.
To what extent has that contributed to the fact we are seeing a resurgent interest in and demand for properties in Ireland? Is that because NAMA has not been disposing of its assets in Ireland, but has been withholding them, thereby creating demand and pushing up activity and prices?
My other question has to do with the model. NAMA has gone from a position of having assets, with very few rents, to getting into a rental driven market. Is NAMA looking at changing its disposal strategy more towards a rental product? I believe that in an article in the papers, Mr. Mulcahy suggested NAMA was looking at selling off 10,000 social units, based on rent and so on, as an investment product for large property management type businesses. Is that a change in model and is NAMA's mandate best served by having a longer period of operation, beyond 2020, so that it can realise the value of rents over a longer period of time rather than dispose of assets?
11:40 am
Mr. Brendan McDonagh:
In terms of our strategy in regard to selling overseas assets, we had no choice. The NAMA board of seven set its target for 25% of its debt by the end of 2013. Within a few months of setting that target, the troika arrived here and adopted that target. It said we had to meet that and had to generate the amount of money required to pay off 25% of the debt by end 2013, whether we were on target towards achieving that or not. The question was where we could get that money and the best place to get it was from the overseas markets where we had assets. During 2010-2011, while the European crisis was almost at its height, London was seen as a safe haven and people were moving their money to London. The majority of buyers of our assets in London have been cash buyers, so were not relying on debt finance. There were also people from wealthy countries and sovereign wealth funds who wanted to buy good assets in good locations and these were driving yields down. The yields on assets in London when we acquired them were probably 5.5% -----
Derek Nolan (Galway West, Labour)
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My question was mainly about the Irish market.
Mr. Brendan McDonagh:
Yes, but the Deputy asked why we sold the foreign assets. When the yields started contracting below 5%, we would take the money and get out. We held back from dumping on the Irish market. We said we would sell as much as we could into the Irish market, but we were not going to do it in a silly way that would make the situation worse. There was a lack of bank finance in the market for mortgages and commercial property here as the banks were forced to deliver.
Derek Nolan (Galway West, Labour)
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Did the NAMA strategy of disposal in Ireland force up prices?
Mr. Brendan McDonagh:
No. If the Deputy thinks about it, when we acquired those assets, we acquired them at yields of approximately 7% in 2009. The yields went all the way out to 9% and are now coming back towards 7%. Effectively, the market is beginning to correct to an equilibrium. We are not holding assets here until yields get down to 2% in Grafton Street, which they did at the peak. That is not our strategy. Our strategy is orderly and phased and is to have enough in the market where there is enough demand.
The recovery story in Ireland has been very important. Fiscally, the Government is staying on track. It is getting out of the bailout programme and getting back into the bond markets. This has been crucially important in terms of the international investors we meet. It is important to them that Ireland is a stable economy, has a stable government and is meeting its fiscal targets. It is doing this, which has led to a lot of people, in a low interest environment internationally, considering the situation here. They can get something like a 1% yield in the US, or get ten-year German bonds at close to that. People are looking for a yield and if they do not invest in government bonds, they want to invest in real assets, which are a big protector against inflation. That is why people are interested. Ireland is seen as a recovery story and that is why they are coming here.
The Deputy asked whether NAMA should continue after 2020. That is not how the board thinks. It is still working towards 2020. This completely presses me and the executive team. We try to ensure that we are continually on target towards 2020. The rental strategy has been driven through asset management, maximising the income on the assets pending their sale. We have 10,000 residential units, mainly apartment blocks in Dublin, Cork, Limerick and Galway, rented out and we have another 4,000 offered up for social housing, which will hopefully be rented out also. Over time, we will sell down that portfolio. That has always been part of the strategy, but in the meantime we wanted to prove they could generate an income. If one has an income generating asset, one will get a lot more for it than for a non-income generating asset. It will attract more buyers. There is nothing unusual in our strategy or change of strategy. Selling the assets was always in the plan, but it is a question of how we do it over time.
Robert Dowds (Dublin Mid West, Labour)
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I welcome the NAMA team. Rather more strongly than normally, I wish them well in their work, because it is so important for the recovery of this country.
In Mr. McDonagh's opening remarks he mentioned the docklands area and said that NAMA was working closely with Dublin City Council in terms of a strategic development zone it has developed there. How is that operating?
Mr. Brendan McDonagh:
Towards the end of last year, the Minister for the Environment, Community and Local Government designated the north and south docks as a special development zone. Then, Dublin City Council, through the city manager, drew up an initial plan in the context of its designation as a special development zone. This plan looks at the land bank area between the new Central Bank headquarters, the infamous building below the Conference Centre which it bought from NAMA, down to the O2 and across the water into the south docklands or the old Boland's Mill area. The initial plan was drafted, presented to the council and published. Submissions were requested and we and a large number of other parties made submissions. These submissions are being considered currently by the city manager and will then return to the council. The plan will probably go then to An Bord Pleanála. I understand that it will be May or June next year before the area achieves its special development status.
In regard to NAMA's interest in the land bank down as far as the O2, we have security, through our loans, of over approximately 90% of the development land. As part of the strategic development zone plan as published, a certain amount of that will be designated commercial and a certain amount residential. It is important the balance is right in that regard. It is also important the balance is right in terms of density and height in the context of the city. This is a matter for the council and the city manager and possibly An Bord Pleanála.
In our engagement on this we are also pointing out there is an issue of key infrastructure. There are two big infrastructure aspects in the docklands. One involves the transport authority and CIE, regarding a new train station or interconnector and how that will be dealt with. If that work is going on, how can building go on around it? The second major infrastructure issue is sewerage and water. There is no point building big buildings and putting thousands of people in the area if sufficient water cannot be provided and, more importantly, if sewage cannot be disposed of properly. It is not just as simple as designating a strategic development zone and saying we will put a commercial business in one place and a residential block in another and everything will be fine.
The reality is that if those other things are not dealt with at the same time, we have to think about them holistically in terms of achieving what will be the best for the city.
11:50 am
Robert Dowds (Dublin Mid West, Labour)
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Does Mr. McDonagh see that as a way of enhancing the value of the assets?
Mr. Brendan McDonagh:
Absolutely. We deal a lot with the IDA and its representatives tell us that when foreign direct investment comes to Dublin, the companies want their locations to be based in the north and south docklands. The big firms are located in the south docklands area near Boland's Mill, with IT companies like Google, Facebook, Twitter and so on. The legal firms also want to be close together there. In the north docklands, we are probably looking more towards the growth of the IFSC through financial services companies and major banks that want premises in that area.
This is not speculative. The last thing NAMA wants to do is to engage in speculative development. The country has had enough problems because of that. However, we need realistic planning so if we have an SDZ and we get demand from a company that wants to locate in Ireland, we can build an office block for it and get it there within a defined period of time. These multinationals have multiple choices of locations in different countries, and they look for security of tenure in terms of delivery of premises.
Robert Dowds (Dublin Mid West, Labour)
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Have Mr. McDonagh and NAMA had conversations with other councils? I am particularly interested in South Dublin County Council, where I believe NAMA controls quite a lot of open land. There is an SDZ in existence for the Clonburris area between Lucan and Clondalkin, and I think NAMA controls most of that land.
Robert Dowds (Dublin Mid West, Labour)
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From what I can gather, I think NAMA controls the majority of the land there. Does Mr. McDonagh foresee any possibility of going into conversation with that council?
Mr. Brendan McDonagh:
We have a very good relationship with all local authorities, because they are very anxious to get investment. There is a dispute going on for a long time between a number of debtors over the future development at The Square in Tallaght. The site with a carpark was owned by South Dublin County Council. We have just done a deal with the council to acquire the carpark, which will allow the future development and growth of The Square town centre, and which will generate about 300 jobs in construction and about 300 jobs on an ongoing basis. We have had a very good engagement with South Dublin County Council, Kildare County Council and with all the local authorities. We meet them quite a lot. If we have security for land in their area, we can tell them what we believe will work commercially and what will not work, and to make a decision on the planning designation.
Robert Dowds (Dublin Mid West, Labour)
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How long does Mr. McDonagh think it will take before there are any developments in that Clonburris area? Will that be dependent on some further infrastructure going in, such as the interconnector rail link that will bring people from the west of Dublin towards the city centre?
Mr. Brendan McDonagh:
I am not aware of the full details, but from what I do know, I believe it is on a medium-term to long-term horizon. Having said that, we have seen that areas we might have thought would have been slow to develop can suddenly become very quick to develop, particularly on the back of a foreign direct investment, where a company wishes to locate its premises in that area. We have had a lot of engagement with South Dublin County Council over the last three years to get substantial foreign direct investment into the area. The council has been very proactive in ensuring that it did whatever was necessary with ourselves and the IDA to make things happen.
Robert Dowds (Dublin Mid West, Labour)
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Am I right in thinking that NAMA recently took over The Mill Shopping Centre in Clondalkin? I think it was a Liam Carroll property before that.
Robert Dowds (Dublin Mid West, Labour)
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I wonder if any of Mr. McDonagh's team can answer. Can I ask the witnesses to write to me about that?
Robert Dowds (Dublin Mid West, Labour)
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There is a tranche of 274 acres of land in Lucan which is up for auction today. It is a very sensitive area of land. If it sells today, that is the end of it, but if it does not, could I suggest that NAMA officials might have a conversation with the local county council to see if there is any other way of dealing that issue? It is a particularly sensitive area, partly because some of it is in the Liffey valley, which is a sensitive area of protection.
Robert Dowds (Dublin Mid West, Labour)
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So it is not through NAMA.
Robert Dowds (Dublin Mid West, Labour)
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My apologies.
Robert Dowds (Dublin Mid West, Labour)
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So NAMA does have an involvement.
Mr. Brendan McDonagh:
We will not deny that we are not the secured lender, but the reality is that the debtor has put the land up for sale at public auction. This has been put up for notice publicly that it is going for public auction for a long time. The local authority has not engaged with us to date, but a particular association contacted us a few days ago about it. If it does not sell today, there is still time for the local authority to engage. We are all for sensible engagement. We are in partnership with all the local authorities. We are not in the situation that existed five or six or ten years ago when people were trying to game the local authorities. That is not what NAMA does. Local authorities are part of the system and NAMA is part of the system, so we try to work with them as best we can.
Robert Dowds (Dublin Mid West, Labour)
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I would like to move on to the area of social housing. Mr. McDonagh referred to the issue in his opening remarks. How many of the sites are in places that are likely to be of value in terms of providing social housing?
Mr. Brendan McDonagh:
Most of our housing stock is in Dublin, Cork, Limerick and Galway. We have made over 4,300 units available primarily in those areas. We also have housing stock in other local authorities, but it is much smaller by number. Anywhere we have stock, we have made it available. Of the 14,000 completed units over which we have security, 10,000 are rented and the 4,000 available are split between Dublin, greater Dublin, Leinster and Cork.
We have very small amounts in Galway and elsewhere in Connacht. In the main, most of our stock is located in Dublin, the greater Dublin area, Cork and Limerick.
12:00 pm
Robert Dowds (Dublin Mid West, Labour)
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Some 10,000 of those properties are rented.
Robert Dowds (Dublin Mid West, Labour)
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What is the position on the other 4,000?
Mr. Brendan McDonagh:
We have offered them to the local authorities and the housing bodies to see if they are suitable for them. As of yesterday, the chairman and I met the Minister for the Environment, Community and Local Government and the Minister of State with responsibility for housing policy, Deputy Jan O'Sullivan and provided them with an update. We have offered up 4,351 properties and they have confirmed a demand for 1,900. We expect about 635 to be delivered by the end of the year, while another 1,300 are under active consideration. We are confident that 400 of these will be taken in January or February 2014. That will leave 800 to be deemed suitable.
Robert Dowds (Dublin Mid West, Labour)
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Does it all depend on the local authority or the Department being able to put up the money?
Robert Dowds (Dublin Mid West, Labour)
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Which there is.
Mr. Brendan McDonagh:
-----there is an obligation on the local authorities to provide housing. Before NAMA existed, no houses were being made available in these numbers to the local authorities. There has been a change in the model. Previously, the local authorities were provided with a capital grant which was used to buy housing. Now the model involves long-term leasing and NAMA is trying to help the process. As soon as a local authority wants social housing, NAMA will buy the property and put it on our balance sheet and lease it out. This facilitates the delivery mechanism very efficiently. We are realistic in that the Government no longer has the money to give the capital grant. NAMA is trying to assist by leasing properties on a long-term basis with an option to buy two thirds of the way through the lease.
Robert Dowds (Dublin Mid West, Labour)
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What are the options for the 10,000 currently rented? Is there the same option for the Government if it is affordable?
Mr. Brendan McDonagh:
As units become available, either through completion of developments by NAMA or as private sector units, we offer them up. We began at the end of 2011 with 2,000 units and now have 4,300. We are constantly trying to offer more in order to be of assistance.
Robert Dowds (Dublin Mid West, Labour)
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Does the Department have first refusal?
Robert Dowds (Dublin Mid West, Labour)
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I have a question about the position on hotels. How many hotels are held by NAMA? What proportion of the total number of hotels is held by NAMA? What impact is this having on the hotel industry? Hotels held by NAMA have been undercutting commercially viable hotels.
Mr. Brendan McDonagh:
We have an interest in just over 115 hotels. A total of 84% of our hotels are located in Dublin or the greater Dublin area, Cork, Kerry and Galway. Twelve hotels are closed. The majority of the hotels are owner-operated and an equal number are either operated by management companies or leased by third parties. We have heard the case being made that NAMA hotels are undercutting others. We have had two engagements with the Competition Authority as a result of complaints to it. We ensure our hotels are viable and that they are not engaged in distorting competition. We have given all of the information to the Competition Authority which stated in its report that it had decided not to pursue the matter as it was satisfied with the information provided by NAMA and that NAMA was not engaged in aggressive pricing. It is quite usual for people operating in the market to throw out the glib comment that NAMA is allowing its hotels to undercut others. That is not the way we operate. We made a commitment to the Competition Authority that NAMA assessed all of its debtors to ensure hotel debtors were viable. If a hotel is not viable and is costing us money, we order its closure and will not fund its continued operation. I can assure the Deputy that hotels operating under NAMA are operating fairly on the basis that the Competition Authority is satisfied.
Robert Dowds (Dublin Mid West, Labour)
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Has the improvement in the tourism sector resulted in the sale of some of these hotels?
Mr. Brendan McDonagh:
Absolutely. There has been a great improvement in hotels. In 2010 one of my big concerns about the hotels portfolio was that occupancy levels were down to somewhere between 40% and 50%. These levels are now over 90% in Dublin and in some of the better tourism areas in Cork, Limerick, and Galway they are around 80% to 90%. There has been a significant turnaround in the hotel sector and there is more buyer interest. Factors include the improving economy, while The Gathering has also resulted in a significant influx of tourists. Many people wish to buy assets in Ireland. A person complained to me last week that he had flown into the country in his private jet and had to pay €300 a night for a hotel room in Dublin, as if he were in London. I suggested he could pay London property prices for Irish property if he wished.
Kieran O'Donnell (Limerick City, Fine Gael)
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I do not know which hotel he stayed in, but it obviously was not a NAMA hotel. NAMA was established for the purpose of getting credit flowing again, to take pressure off banks' balance sheets and provide a structure to get the economy moving. I will deal in my questions with the reasons for the establishment of NAMA and its achievements to date. I am asking questions from the point of view of the taxpayer. I include in that regard those on social welfare and the unemployed who have all contributed with their taxes.
When IBRC loans transferred to NAMA, they increased its assets by 50%. It now has a balance sheet of €22 billion. I reckon this will increase to-----
Kieran O'Donnell (Limerick City, Fine Gael)
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The gross loan book could be even higher.
Kieran O'Donnell (Limerick City, Fine Gael)
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NAMA is enormous. On the Irish property landscape it is like an ocean liner with small boats circling around it.
I wish to deal with the issue of performing loans.
When was NAMA established?
12:10 pm
Kieran O'Donnell (Limerick City, Fine Gael)
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When did it commence operations?
Kieran O'Donnell (Limerick City, Fine Gael)
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When did it reach the point where its balance sheet was complete in the context of transfers?
Kieran O'Donnell (Limerick City, Fine Gael)
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Will Mr. McDonagh indicate the difference in the percentage relating to performing loans between the time NAMA commenced operations and now? That is the first figure I would like to establish because, as with any business, I would like to carry out a comparative analysis. Obviously, this is the taxpayer's business.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay.
Kieran O'Donnell (Limerick City, Fine Gael)
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What is NAMA's current cash balance?
Kieran O'Donnell (Limerick City, Fine Gael)
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I wish to focus on the payment of dividends. How much has been paid to the covered institutions - the banks - in respect of NAMA bonds to date?
Kieran O'Donnell (Limerick City, Fine Gael)
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Therefore, the banks have received just short of €8 billion in capital and interest repayments. Is that correct?
Kieran O'Donnell (Limerick City, Fine Gael)
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To whom is the dividend paid?
Mr. Brendan McDonagh:
In the context of how it is established, NAMA sits at the top - as the State body - and underneath there is the special purpose vehicle which is to keep the organisation off-balance sheet for Government debt purposes. That is capitalised with equity of €100 million, of which €51 million comes from private investors and €49 million from NAMA. The private investors are the people who receive the dividend.
Kieran O'Donnell (Limerick City, Fine Gael)
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Who are the private investors?
Kieran O'Donnell (Limerick City, Fine Gael)
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Therefore, we have New Ireland Assurance which is effectively AIB----
Kieran O'Donnell (Limerick City, Fine Gael)
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What is the name of the second private investor?
Kieran O'Donnell (Limerick City, Fine Gael)
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What is the name of the third investor?
Kieran O'Donnell (Limerick City, Fine Gael)
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How much have these investors been paid to date in dividends?
Kieran O'Donnell (Limerick City, Fine Gael)
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Will Mr. McDonagh outline the process by means of which the taxpayer will see a return from NAMA by the target date of 2020? Ultimately, NAMA is underwritten by the taxpayer. Is that correct?
Kieran O'Donnell (Limerick City, Fine Gael)
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Will Mr. McDonagh outline the process to which I refer?
Kieran O'Donnell (Limerick City, Fine Gael)
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I want to determine how the ordinary person will be affected. This is an extremely important matter.
Mr. Brendan McDonagh:
Absolutely, it is crucially important. The taxpayer is on the hook because the Government guaranteed the NAMA bonds. That started out at just over €30 billion and by the end of this year will be down to €22.7 billion. Until that liability is repaid, there will be no distribution to the taxpayer. Our plan, as we stated, is to reduce the €22.7 billion to zero by 2020. That is the plan the board is working towards. If we had-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Therefore, the first time the taxpayer will see any return from NAMA will be when it is wound up----
Kieran O'Donnell (Limerick City, Fine Gael)
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-----not before.
Mr. Brendan McDonagh:
No, because we will have to get rid of the contingent liability of the State. If NAMA could sell its entire portfolio tomorrow without making a loss-----
Kieran O'Donnell (Limerick City, Fine Gael)
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What determines the rate of the dividend paid to the private investors?
Kieran O'Donnell (Limerick City, Fine Gael)
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Therefore, it is based on the ten year-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Can the private investors sell their 51% shareholding in NAMA?
Kieran O'Donnell (Limerick City, Fine Gael)
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Has any of it been sold to date?
Kieran O'Donnell (Limerick City, Fine Gael)
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Is Mr. McDonagh surprised that the number of performing loans has dropped below one fifth? As the agency has been up and running for three years, why has this happened?
Kieran O'Donnell (Limerick City, Fine Gael)
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Effectively, 82% of the loans are not performing.
Kieran O'Donnell (Limerick City, Fine Gael)
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NAMA was designed to take over both performing and non-performing loans.
Mr. Brendan McDonagh:
Yes, but the reality was that the first key link into the banks related to the riskiest loans, namely, those relating to land and development. If debtors had other associated loans, these came with the land and development loans. This was because there was talk about taking the systemic risk of the debtor out of the system also. We have sold over €9 billion worth of assets. Many of the assets we sold were income producing because that was where the market demand lay. What we are doing in the meantime is investing development capital in order that the work on other assets can be finished. Once these assets are income producing, we can sell them. There is a constant need, as one sells, to replenish-----
Kieran O'Donnell (Limerick City, Fine Gael)
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I have two quick questions on that issue. Does Mr. McDonagh expect the ratio of performing and non-performing loans to improve in the period to 2020? Has it been projected to improve or remain static?
Mr. Brendan McDonagh:
No, it is going to decline over time as we sell our income-producing assets. That feeds into the impairment exercise we carry out. When we do up our cashflows for the Comptroller and Auditor General's audit, we look at the disposal value of and the income relating to all of the assets up to 2020. The board is projecting that during the final years of its life, NAMA will accrue very little income from the assets.
Kieran O'Donnell (Limerick City, Fine Gael)
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Does Mr. McDonagh expect the taxpayer to obtain a return on NAMA?
Mr. Brendan McDonagh:
All the board is prepared to state at present is that we expect NAMA to get rid of the contingent liability by 2020. After that, we hope-----
Kieran O'Donnell (Limerick City, Fine Gael)
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What does that mean in layman's terms?
Kieran O'Donnell (Limerick City, Fine Gael)
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Does it mean the taxpayer will be on the hook for an additional cost?
Kieran O'Donnell (Limerick City, Fine Gael)
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Is Mr. McDonagh saying it will break even?
Kieran O'Donnell (Limerick City, Fine Gael)
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Am I correct in stating the level of impairment to date is approximately €3 billion?
Kieran O'Donnell (Limerick City, Fine Gael)
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What does Mr. McDonagh expect the level of impairment to be by 2020? Factoring in the impairment charge, what discount has been applied to the loans transferred from the financial institutions?
Kieran O'Donnell (Limerick City, Fine Gael)
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The loan portfolio is approximately €26 billion gross.
Kieran O'Donnell (Limerick City, Fine Gael)
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Therefore, the impairment figure is approximately €3.3 billion.
Kieran O'Donnell (Limerick City, Fine Gael)
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How will the profile of the impairment coverage rate develop between now and 2020?
Mr. Brendan McDonagh:
As I informed one of the Deputy's colleagues earlier, some of the impairment charge will unwind because of the technical feature of discounting disappearing over time.
However, we are seeing that compensated by taking more interest income in the period. That interest income will compensate so that at the end of the period, we will break even.
12:20 pm
Kieran O'Donnell (Limerick City, Fine Gael)
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In terms of the IBRC and the valuation of the loans, what is NAMA’s involvement in the valuations at which the loans are being taken over? What is NAMA’s general view on that? NAMA has €4.1 billion in cash at the moment. What does it intend to do with it? I would also like an indication in terms of the SME sector.
The availability of office accommodation arises in terms of IDA Ireland. I will ask a local question. IDA Ireland came before the committee recently and expressed concern about the availability of office accommodation in Limerick city centre in terms of attracting foreign direct investment. What plans does NAMA have in that area? We would like to have a full array of office accommodation to attract multinational companies who it is clear are keen to come to Limerick.
Mr. Frank Daly:
Before Mr. McDonagh replies in detail to the Deputy, I wish to comment on his earlier points. I would not like the impression to go out that the taxpayer will not get a return on NAMA until 2020.
Kieran O'Donnell (Limerick City, Fine Gael)
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Mr. Daly will appreciate this is only business.
Mr. Frank Daly:
If the Deputy is talking in real money terms, I must point out that the activities of NAMA to date have included taking the €74 billion off the balance sheets of the banks. One would have to wonder what state the banks would be in now if that had not happened. As Mr. McDonagh has pointed out, the mandated income which is now coming into NAMA, and therefore ultimately to the taxpayer, which was not the case before the debtors came into NAMA, include the assets recovered through asset searches totally €850 million. Social housing has benefited through the provision of sites to local authorities, and sites have been provided to the health sector and education. We are keeping a lot of those debtors going through ordinary working capital. That is keeping jobs intact and is growing jobs. The €500 million of investment put back into those debtors was to help them to grow and expand and to preserve, protect and grow jobs. It is fine to talk in money terms but there is another wider dimension to what NAMA has been doing for the past three years.
Kieran O'Donnell (Limerick City, Fine Gael)
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I am not saying that but Mr. Daly must appreciate that we have to ask the questions.
Mr. Brendan McDonagh:
In terms of the IBRC valuation, that has been handled by the special liquidator. We have no role in the valuation of the assets. The liquidator will value them and offer them to the market. It is great if the market buys them, but if it does not, they will go to NAMA as we are the reserve buyer. That is what the Minister has directed and that is part of the legislation in terms of the IBRC liquidation.
In terms of what we will do with the €4.1 billion cash balance, €1.25 billion of it will be used to meet the €7.5 billion target by the end of the year. We are also directed by the Minister to keep €1 billion on stand-by to give to the special liquidator if he needs it for capital for the very businesses Deputy O’Donnell mentioned, which are within the IBRC, if they need money and he decides it is worth advancing money to them as working capital. That is guaranteed by the Minister in terms of getting it back. We are always conservative in terms of holding enough cash on NAMA’s hands. Many people think Ireland is broke and that we are desperate to sell assets at whatever price they offer. I say to potential investors that it is lovely to meet them and thank them for coming to this country. I say that we really want to do business with them but when I say we have €2 billion cash in the bank, their faces drop because they realise we are not a distressed seller. That is very important from the point of view of value for money for the taxpayer.
We actively engage with the IDA. In Limerick, not only have we spoken to the IDA but we have also spoken to the new city and county manager, Mr. Murray, who is a very able and competent man. A number of items are under discussion in terms of where we might potentially have premises which might be useful. As Deputy O’Donnell is aware, in Limerick no more than elsewhere, we say to people that if we invest money to complete a project or develop something, we want to know that someone will be there rather than it just being a question of building it and they will come. We have enough buildings around the country. Limerick is one of the key strategic locations in terms of where we have our assets. Through active engagement with Mr. Murray and the IDA, Deputy O’Donnell will begin to see solutions.
Kieran O'Donnell (Limerick City, Fine Gael)
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That is good.
Mr. Frank Daly:
I was down in Limerick earlier this week and I made the point that NAMA sold the opera site to the city council recently and there are great plans for it and that people could regard it as a pointer to the way we can also interact with the city council, the chamber of commerce and the IDA. There are a couple of other sites, some of which are obvious eyesores and do nothing for the city.
Kieran O'Donnell (Limerick City, Fine Gael)
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That is great.
John Deasy (Waterford, Fine Gael)
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I will stay on the same point. Since its formation, how many sites, assets and buildings has NAMA disposed of to the IDA and its clients who are interested in investing in this country?
John Deasy (Waterford, Fine Gael)
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There have been between nine and ten.
John Deasy (Waterford, Fine Gael)
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Could Mr. McDonagh give me an example of who were the investors?
Mr. Brendan McDonagh:
Some of the projects are still under way so I cannot say anything about them, but a project which is in the public domain is Novartis in Elm Park in Dublin 4. We have also disposed of sites to two major international data centres in south County Dublin. Those projects were IDA-backed. Other projects include the Millennium Park in Naas and the Kerry Group, which is also a substantial site. Google bought the Montevetro building. That was one of the first buildings we sold. We have a number of others which are very sensitive at the moment but they are close to being finalised.
John Deasy (Waterford, Fine Gael)
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That is fair enough. Mr. Barry O'Leary came before us last week and the IDA recently warned that there is a shortage of prime commercial property in Dublin in particular which could hamper investors considering Ireland. I am always interested in the connectivity and communication between different Departments. How closely does NAMA work with the IDA?
Mr. Brendan McDonagh:
Within NAMA, we have a designated property person who deals with a property person in the IDA on an operational level. At the more strategic level, the head of property in the IDA liaises directly with John Mulcahy, head of asset management. Barry O’Leary and I have discussions from time to time.
John Deasy (Waterford, Fine Gael)
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That is fair enough. Mr. McDonagh has a threshold. He said he does not want to develop a project or hand over a property that might not be used.
Mr. Brendan McDonagh:
The mandate of NAMA is to be commercial. The reality is that most of the foreign direct investment companies just want a premises. They want to know if they can get one and when it will be delivered. The issue to which Mr. Barry O’Leary referred is grade A office space in the central business district in Dublin. There are only approximately four or five buildings of 100,000 sq. ft. or more which are available. Mr. O’Leary tells me about some of the investors to whom he is talking in terms of those properties, but in other cases he does not say anything for reasons of confidentiality and because he is trying to negotiate. He might ask about a particular property an investor is considering to find out how soon it could be delivered. If the property is in NAMA, we work hard to deliver it. Mr. O’Leary is correct to point out that there are a few sites around those areas where people want to locate.
For instance, those involved in the IT sector all want to be located in the same area around Google or whatever the case may be. One would be looking then at deciding to build from scratch, and were one to do this, one must have the right planning. One issue is that the special development zone for the north and south docks is crucial in terms of allowing this. However, even if the aforementioned special development zone comes into being in May 2014 and if it is working properly, whereby one submits the planning application and it is fast-tracked, then the first building probably would be delivered in 2016 or early 2017. There is a certain lead-in time, and that is what Mr. Barry O'Leary is worried about in the first instance.
12:30 pm
John Deasy (Waterford, Fine Gael)
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Fair enough, I understand. I have another "how many" question. I apologise if this has been answered already but it goes back to those individuals who have worked in NAMA and who went on to work for a company that does business with NAMA. Since NAMA's formation, how many people have left the agency and gone to work with companies that do business or have done business with NAMA?
Mr. Brendan McDonagh:
The figure we have quoted is that between last year and this year to date, we have lost 50 people. Some of these people obviously have joined companies which have nothing to do with NAMA. However, to be realistic with the Deputy, a number of other people have joined companies that may have some dealings with NAMA. As I indicated earlier, our best defence against that is to make sure that assets are openly marketed and that, in effect, by having the same information as everyone else, no one can steal a march on anyone else.
John Deasy (Waterford, Fine Gael)
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Mr. McDonagh knows what I am asking.
John Deasy (Waterford, Fine Gael)
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I am trying to get the rate here. I worked in the United States and the big debate 20 years ago pertained to the revolving door in respect of United States Senators and Congressmen. Eventually, they dealt with the issue but it took years. They have a vastly more developed lobbying system over there and eventually they were obliged to do something about it. While that has been talked about in Ireland, given the sums of money involved and the importance of NAMA to the taxpayer, can Mr. McDonagh give me an idea of how many of the aforementioned 50 people have gone to companies that have done or do business with NAMA? I was not present for the question but I have been informed that Mr. McDonagh referred to a three month or six month cooling-off period. I am trying to figure out how many people have actually gone to such companies.
Mr. Brendan McDonagh:
It is a notice period, and during that time, we can put people on gardening leave if we think it necessary to so do. In respect of the property and private equity buyers, probably about five of the 50 staff have gone to those. The rest of the 50 staff have joined other banks or-----
John Deasy (Waterford, Fine Gael)
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In other words, 10% of the staff went to such organisations.
John Deasy (Waterford, Fine Gael)
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Is it the case that NAMA is not overly concerned about this?
Mr. Brendan McDonagh:
The reality is that people have the right to move job. However, they are under contractual obligations and statutory obligations in respect of the Official Secrets Act as well as confidentiality clauses in the NAMA Act. There are provisions to enable one to deal with someone who breaches such obligations. I reiterate that the biggest defence is for an asset, which is put up for sale by NAMA or by the debtor in a case to which NAMA must give its consent, to be openly marketed in order that anyone who can buy that asset has an opportunity to bid for that asset and has the same information as anyone else. It is a difficult issue and I accept what the Deputy is trying to say. The reality is that people will come to work in NAMA, where they will work for a number of years, after which they will try to get a job somewhere else. This is what is happening. People are being given opportunities elsewhere because we cannot compensate them, to be frank with the Deputy, in the context of trying to hold on to them.
John Deasy (Waterford, Fine Gael)
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I have a question that may be appropriate to ask of the chairman of NAMA. It probably is fair to state that Waterford's city centre has suffered a great deal over the past five years with the departure of businesses. My understanding is that NAMA is examining its assets around the country to ascertain how they can be rejuvenated and turned into viable options. Included among the sites is the Michael Street site in Waterford city, which I am told could be developed by the original promoters with approval from NAMA. I understand, and it has been stated in public, that there have been talks about developing the site, possibly with the original developers. As I understand it, there was a two year planning process, which ended in late 2008 with approval being given by An Bord Pleanála. The Waterford local authority implementation group report published this month mentioned the Michael Street site a couple of times. It spoke of the site's importance, and in its recommended high level intervention section, it stressed that the local authority, in conjunction with NAMA and other stakeholders, should progress further in the development of an appropriate retail centre in Michael Street, Waterford. It is a block, formed by New Street, Michael Street, Alexander Street and Stephen Street, in a central location in a city that really has been devastated in the retail sector in particular. What kind of developments have taken place with the local authority and the developer in question?
Mr. Frank Daly:
Yes, I am somewhat familiar with the site. It is about three acres in size and there is a functioning multi-storey car park on part of it at present. There is a series of other buildings and a current planning permission, which I believe expires probably later this year. However, the general consensus appears to be that the current permission is unviable in the times we are in. That is a consensus across most of those who might be involved in it, including ourselves. NAMA has done some work on it because we have funded the demolition of six derelict houses on New Street, where there were complaints about anti-social activity and behaviour. We also have demolished a derelict sports hall at which the same problem had emerged. In addition, in co-operation with the owner, quite a few shops on Michael Street have been repaired and renovated. Consequently, there is not complete inactivity on the site, but to get to the core point, the current permission probably is not viable.
However, everyone agrees there is a strong case for a good retail development in that area of Waterford. That is part of the Waterford city development plan and, as the Deputy noted, the implementation group on the reorganisation of the local authorities in the region certainly has highlighted it as one of its high level interventions. I spoke recently to the city manager on the subject. As to what is happening at present, a design study has been commissioned and a survey is being undertaken about retail demand in the area. We are actively engaged with the city manager in looking at that site in the coming months. As to the involvement of the original promoter, that is something that must be teased out as we go along. NAMA's general policy is of open marketing and open involvement, but the Deputy can be assured that there is active engagement between ourselves, the city council and the city manager on the site.
John Deasy (Waterford, Fine Gael)
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So the first thing is that new planning permission must be sought.
Mr. Frank Daly:
As far as I am aware, it is generally agreed by everyone that the current permission is not really viable and one must move to a new one that perhaps may have a somewhat more simplified mix on the site of retail and perhaps some residential and so on. However, I am aware that the city council also intends to be very active with regard to access to the site and from Dungarvan, Kilkenny and all of that. It comes back to the point that if we can see something commercially viable coming out of there, we certainly will be very active in there. I do not wish to get into legalities here but there may possibly be an issue in the background there that must be solved along the way.
John Deasy (Waterford, Fine Gael)
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I thank the chairman.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Cuirim fáilte roimh uilig. While this issue has been raised by other colleagues, I wish to ask Mr. McDonagh about staff leaving and going to work with other property entities and people who have had interactions with NAMA.
He has explained that the notice period is three months. Does he not believe it would be a good idea to have a cooling-off period? I entirely accept the point that one cannot stop people from earning a living. That is the reality of it. People will naturally change, move and advance in their careers; I accept that. However, it would not be unusual in an institution such as NAMA, given its work on behalf of the State and the taxpayer, that there would be additional sensitivity and a provision for a cooling-off period. What is Mr. McDonagh's view on that? Would he favour that? Has he suggested it?
12:40 pm
Mr. Brendan McDonagh:
To explain the point to the Deputy, when people joined NAMA they were subject to a three-month notice period. NAMA does not have employees itself; they are all employed by the NTMA. People in the NTMA had a notice period of only one month. This contrasts with the position in NAMA, in which we said we wanted a three-month notice period. That was put in place from the very start.
The NTMA, further to its having taken legal advice, has stipulated in respect of newly hired staff and people promoted into senior positions, which happens in organisations over time, that the notice period can be extended to six months. Part of the provision for those with new contracts and those who are promoted is such that if they move to a company that is to deal with any part of the NTMA, not just NAMA, they must recuse themselves from dealing with that company for a further six months.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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That does not equate with what is understood as a cooling-off period. Is Mr. McDonagh saying that NAMA intends to follow suit, in line with the new-----
Mr. Brendan McDonagh:
This is a policy that will be implemented across the NTMA. Therefore, any new people coming into NAMA will be subject to it. The issue really revolves around people who already have contracts of employment and cannot change them. However, we are managing this very carefully. We have told staff that if they are going to join an organisation we believe might be interacting with us, they should leave on the day of resignation. We stipulated a three-month notice period and that one cannot contact anybody in the office. We shut off IT systems.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Will there now be a six-month notice period?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I am just clarifying for anybody who might be watching the proceedings of this committee that the provision will apply to new staff.
With regard to existing staff whose contracts specify a three-month notice period, Mr. McDonagh said there is an option of gardening leave, which is a term I always find quite amusing. There would be a lot of gardening done in three months. NAMA lost 50 staff and Mr. McDonagh reckons 10% of them, amounting to five, went to property management organisations.
Mr. Brendan McDonagh:
Property or private equity firms that would, in all probability, have engaged with NAMA previously or could potentially engage with it.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Were the 50 staff, specifically the five, put on gardening leave for three months?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Mr. McDonagh concedes the point that there is a dilemma here.
Mr. Brendan McDonagh:
Absolutely. The management and board of NAMA are very sensitive to this point. We are doing everything we can legally to deal with the matter.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I am sure Mr. McDonagh can appreciate that although there is a sectoral norm, the average person looking in at the NTMA and NAMA regards their staff as well paid by any standards. The staff work on behalf of the taxpayer; that is their mandate. Therefore, they will understand that there is considerable sensitivity, not just in NAMA as an entity but also among the general public in that the agency is working in the public interest, over the notion of people hopping from NAMA to another commercial organisation and bringing their knowledge with them. One cannot erase it from somebody's mind. Have Mr. McDonagh and Mr. Daly, who must work within NTMA norms, had a discussion at any stage with the Minister or anyone else? Have they suggested a cooling-off period of, say, 12 months, which would not be excessive or overly arduous? Have they had this conversation?
Mr. Frank Daly:
The main responsibility for this rests with the board. We are trying to juggle a lot of things here. We are trying to juggle the desire to have a reasonable contract for people with the fact that we are finding it very difficult to hold on to people in the first place. We are finding it very difficult to recruit people. Therefore, there has to be a balance in respect of the conditions attached to staff contracts. As Mr. McDonagh said, the board is very conscious of this matter. We would be satisfied with the situation that obtains now.
Much conversation takes place on this matter. It is almost as if there were evidence that people had abused their positions. That is not the case. Mr. McDonagh outlined earlier the consequences of abuse, under the Official Secrets Act, the NTMA legislation and section 202 of the NAMA legislation. One must look at this in a balanced way. People move from organisations such as NAMA and move within the financial and property sectors. They are being poached from NAMA, I believe, for their expertise and skills, for which we hired them in the first place. I do not believe they are being poached for any so-called insider knowledge they might have or any use they might make of information relating to debtors that they gained in NAMA.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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That might well be Mr. Daly's assumption.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Absolutely.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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That is fair enough. For the record, let it be said that I am not casting any aspersions on any individual bar in respect of the case reported in the media of abuse that was uncovered. I understand there is a Garda investigation. We might come back to that.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I will come back to that.
I am raising the point not to cast aspersions on any individual but to suggest this is a matter of good practice and of having systems in place. It should not be a matter of Mr. Daly or me speculating on whether staff are being recruited for reason A, B or C or for insider knowledge. Given the task and mandate of NAMA and the fact that there could be outside interests that just might seek to headhunt a senior member of staff from NAMA for his insider knowledge - having such knowledge is unavoidable if the staff member is doing his job properly, which I presume is the case - there should, as a matter of good practice, be a cooling-off period. A period of 12 months would be appropriate and not overly arduous. It would not stop somebody from getting a different job but would stop him from getting a job that would result in a conflict of interest. I would have believed that the board of NAMA would have raised that matter with the Minister as a matter of good practice. It has not done so.
Mr. Frank Daly:
The board has responsibility. While the board is satisfied with what is happening and is balancing everything, the Deputy is making many hypothetical arguments. I do not want to come across as being defensive on this but believe we have a fairly balanced regime in place. It is rigorous and onerous. If there were a cooling-off period of 12 months, for example, one could not interfere with somebody's right to work without actually paying him during the period in question. Taxpayers might have another question to ask, through Deputy McDonald or another Deputy, if there were people in NAMA sitting at home for 12 months while being paid by the agency. The board balances and considers all these factors.
We are now in a space where we are comfortable with what we have. I can assure the Deputy that it is something we pay a lot of attention to and which is reviewed and monitored regularly.
12:50 pm
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I thank Mr. Daly for that. To be clear, I believe it was a mistake from the inception of NAMA not to have joined the dots and looked for potential conflicts of interest and not - as a matter of good practice - to have initiated that cooling off period from the get-go. I have heard Mr. Daly's answer, however. As regards winding up Anglo or the IBRC, how many staff does Mr. McDonagh anticipate will come across to NAMA?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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When does Mr. McDonagh anticipate that will happen?
Mr. Brendan McDonagh:
Whenever the liquidator completes the sale of the loan books, or does not and says they are coming to NAMA. It will start on a phased basis because each loan book is being sold on a different phase. It will probably start towards the end of this year all the way through to mid-2014.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Can Mr. McDonagh give an idea of the staff that are coming across to NAMA? Who are they and what do they do?
Mr. Brendan McDonagh:
They work mainly in debtor management. We call them asset recovery people. They are basically people who engage with debtors to ensure they are repaying their loans, selling underlying assets or mandating rents. There are also some IT people and financial accounting staff. They are probably the main people who will be coming across.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Will some fairly senior people also be coming across from the management ranks?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Would people be coming into NAMA who would have been in senior managerial roles within Anglo prior to the wind-up?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I take Mr. McDonagh's point that this is work in progress. Will they come across with the same terms and conditions and rates of pay?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Can Mr. McDonagh talk me through that?
Mr. Brendan McDonagh:
One cannot have people on different rates of pay in the same organisation. It is always very difficult to achieve that. We moved our existing NAMA book out of IBRC in August this year and we made an offer to a substantial number of people in IBRC to move to NAMA, but they turned us down because we would not pay them their existing pay and conditions, which were much higher than those working in NAMA.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Officially, therefore, these people will work for the NTMA.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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If I am not mistaken, the NTMA can be sensitive about setting out what those rates of pay are.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Presumably when the transfer of staff happens and that work is completed, this committee can have access not to names of individuals coming across, but full information in respect of who is transferred across and what salary bands they are in.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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They will be working under the auspices of NAMA.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Yes but they will be part of the NAMA operation. That is why I am putting the question to Mr. McDonagh.
Mr. Brendan McDonagh:
Yes. Effectively, it does not cost the NTMA because NAMA pays the NTMA for them but they are employed by the NTMA.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Yes, I understand that but I am asking if they will be part of the NAMA operation.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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We will have access to that information on how many and at what levels.
Mr. Brendan McDonagh:
Yes. The NTMA annual report splits NTMA and NAMA staff, and the salary bands they are in. That information will, no doubt, be published by the NTMA.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Since the special liquidator is still doing his work, Mr. McDonagh has no sense of the loans that may transfer to NAMA. I am asking this for a simple reason. Mr. McDonagh has referred several times to clearing the decks by 2020 and the strategic plans to make that happen. Does he have any reservations or worries about that? I assume he has built in the variables of the IBRC and whatever loans might be transferred across to NAMA. That must be part of his calculations.
Mr. Brendan McDonagh:
That has to be part of the board's next strategic plan. The way the mechanism is set up legally is that the responsibility and continued management of the IBRC is in the hands of the special liquidator, including the sale and evaluation processes. All we have at the moment is high-level information which is in the public domain. There is one portfolio for sale at present which is a cash-flow trading business and is close to €4 billion. There is the old INBS mortgage book, which is €1.8 billion or €1.9 billion.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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About €2 billion, yes.
Mr. Brendan McDonagh:
There is an Irish commercial real estate portfolio, which is around €9.5 billion. There is a UK commercial real estate book, which is about €7.5 billion. That makes up the sum total of the book. That is all the information we have. That is the type of information we got in 2009 before NAMA was set up. The reality is that that information tells one nothing. It is when one actually gets under the bonnet-----
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Does Mr. McDonagh take my point? I have heard what he said about planning it out.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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For 2020.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Hold on, so that we are clear. It is fine for Mr. McDonagh to make that statement about the current loan book. However, the world wants to know when will he have finished his task. When will he have removed the entirety of the contingent liability on the State and its citizens? In a sense, while it is not misleading, it is not fully complete, to say "we therefore can confidently say that we will have cleared the decks by 2020 because this IBRC loans issue that might be transferred is unquantifiable". I take the point that at this stage Mr. McDonagh does not know what exactly he will have to deal with.
Mr. Brendan McDonagh:
I thought I was clear in my opening statement and I am sorry if I was not. As regards our existing loan book, we start off at €30 billion and will be down €22.7 billion this year. We are quite confident that we will be down to zero by 2020. As regards the IBRC loan book, we do not know what is under the bonnet other than the high level of information, as I have told the Deputy. We will approach it in the same way as we approached our existing book, by getting under the bonnet as quickly as we can and then working out a timeline when we think that can be resolved.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Okay.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Will Mr. McDonagh be "under the bonnet", to use his term, towards the end of the year?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I have one last question about the docklands. I understand Mr. McDonagh's concern and the IDA's concern for commercial space. I represent the northside of that docklands area. Mr. McDonagh spoke about the new Central Bank, but I would have thought that Boland's Mills was the building of note on the southside. The previous Docklands Authority made an unholy mess of the development of that area and there are concerns locally that that should not be repeated. I was gratified to hear Mr. Daly talk about examining things holistically, including working with the HSE for primary health-care centres and whatever other social infrastructure might be delivered in that part of the city.
Given the position the agency occupies, will the agency reiterate its understanding that these proprieties are not just in commercial zones but in old neighbourhoods in which people live. What progress has been made in providing premises for health infrastructure in the area in question?
I cannot understand the hold-up with local authorities and the 4,000 units which the agency has identified as suitable for social housing?
1:00 pm
Mr. Brendan McDonagh:
The former and current Dublin city manager, as well as the council, want to get the Dublin docklands strategic development zone, SDZ, right. We are supportive of this and that is why it needs to be done in a way that works for both the businesses involved and the local communities. The chairman has met the local communities there to find out what they want for housing, schools and health infrastructure. We are into sustainable development which can be done commercially. The mistakes of the past were not the agency’s.
Mr. Frank Daly:
It has to be sustainable. We are also ensuring that we listen to the people, the local communities and the schools involved. Last week, I met with an association of former dockworkers who are looking for a venue to display historical artefacts related to their former work. Our overwhelming desire is that it will be commercially successful so it will bring business to the area and sustain people living there.
Mr. Brendan McDonagh:
On social housing, it comes down to two points. One, a local authority may inform us there is too much of a concentration of social housing in an area and it is trying to limit it. We cannot control that and it is up to the authority to work with a community as to what is an appropriate limit.
The second point is that the approved housing bodies were really reluctant to sign leases for NAMA properties as they were only interested in getting a capital grant from the Government to buy the units. There has been some re-education going on in this area. As I said in my opening statement, we will continue to make units available for social housing and the quicker people engage with us, the quicker they will be delivered. We will put €10 million into completing these units. As such works will include finishing apartment blocks, landscaping and so forth, it is a win-win for everyone involved. We are doing everything to address this issue.
Yesterday, we informed the Ministers, Deputies Hogan and Jan O’Sullivan, that we have noticed there is more traction on the other side to take these units from the agency now. If not, the market will take the units and they will not be available. Everyone involved is beginning to understand this is a once-in-a-lifetime opportunity. It will not solve the whole issue but it will be a substantial contribution to resolving some of it.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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In his opening statement, Mr. McDonagh referred to the difficulties in retaining staff and the demand for existing qualified staff from other banking and property sectors. Is that a softening up to increase salaries and change contracts for these staff?
Mr. Brendan McDonagh:
It has been said some in the banking and property sector did not speak loudly against the claims there would be a soft landing in the property sector during the banking crisis. We have highly qualified and good staff. However, we have a complex portfolio with 55,000 individual property units. The people buying our assets are no fools. I need smart and clever people on my side of the table to make sure we protect the taxpayer. We will continue to do the best we can. However, an important tool of my operation is having the right people.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Yes, I understand that. However, to retain the right staff against private sector competition, is Mr McDonagh proposing better contracts and increased salaries in line with what they are being offered by the banking sector? Has the agency had this discussion with the NTMA, National Treasury Management Agency, or the Minister?
Mr. Brendan McDonagh:
We certainly have had that discussion with the NTMA, as it is the employer. Both the Department and the Minister would be aware of what is happening around this. It is a fact of life that people are getting the opportunity to move because of more remuneration. To do this job properly, I need to have people with the right skillsets. There is no point in me coming back in a year’s time to the committee to say I have not met my cash flow generation targets because half of my staff left. I am just pointing out an economic reality.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Has Mr. McDonagh raised this with the NTMA and made recommendations?
Mr. Brendan McDonagh:
Yes. It is an issue that is on the radar of the board of NAMA and the advisory board of the NTMA on which the Secretary General of the Department of Finance sits. The Minister is aware of this issue. There is an economic reality at play. An adjustment has happened and I am pointing out the factual position as a result of this.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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In 2012 when Mr. McDonagh was before the committee, he mentioned several developers and property owners who were receiving payments from NAMA to help it work properties on its books. How many are still on the agency’s books? What kind of remuneration are they receiving?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Is NAMA paying 167 individuals a total of €12.1 million?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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What are the bands of payment?
1:10 pm
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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That will continue on for the next-----
Mr. Brendan McDonagh:
Until the underlying assets are sold and we have a use for them. If we no longer have a use for them, they do not get paid any more. Effectively, it will be while we believe they are adding value in terms of protecting the interests of the taxpayer and it is cheaper than the alternative option, which is sometimes receivership which is a multiple of that in terms of expense,
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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NAMA paid the banks €8 billion in loan repayments and interest. Is that correct?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Separate to that, NAMA paid the banks €56 million in fees in 2012. Would that be every year? I know what it is for but it is roughly paid-----
Mr. Brendan McDonagh:
Since IBRC went into liquidation, we have had to replace it and move that operation and hand our existing IBRC portfolio to Capita. Effectively, it is just a substitution of a service provider. While the banks are helping us to manage books, we would continue to pay them a fee. Under European Commission approval, the fee is capped at costs recovery or a maximum of ten basis points. Our fees for last year and this year are less than that at eight basis points.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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NAMA is paying them that fee because it has taken over the loan books.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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If NAMA did not take those roles over in the first place, would the banks not have to manage those debts anyway?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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So that is an extra cost? That is NAMA's cost.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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In terms of the initial takeover of those loans and how NAMA established the ones it was going to take over from the different banks, it looked at the general loan portfolio of all the banks. It then took a section of those loans. It looked at the ones that were left with each of the banks. How many of these loans are borderline in respect of where they should be either in NAMA or some other arrangement? I am talking about commercial properties and buy-to-lets that are obviously in distress. How much more debt is there that would be of concern?
Mr. Brendan McDonagh:
I am not aware of the current position because I am not dealing with the banks. At the very start, the European Commission was specific about the type of loans that NAMA could take. It said we could only take land and development loans and associated loans of a debtor if they had a land and development loan in the first place. The banks' books - and I do not know what the quantum is - contain loans which, as the Chairman specified, are properly buy-to-let or other commercial properties but did not have any land and development loans at that time so they were not eligible for transfer. That was not controlled by us. It was controlled by the European Commission.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Note 9.1 of the report concerns the board of NAMA. How many members are on the board?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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When do their terms expire?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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The statement says that each board member gets €60,000 a year. I presume this is correct?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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One board member got €75,000.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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The planning advisory committee is made up of a separate group.
Mr. Frank Daly:
There are two advisory committees called for under the Act - one on planning and the other on Northern Ireland. The Act also allows for two external members for each of those committees. Other than that, they are made up of people from NAMA.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Those amounts do not increase year on year?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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When will the new member be appointed?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Does Deputy Eoghan Murphy wish to ask a question?
Eoghan Murphy (Dublin South East, Fine Gael)
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I thank the Chairman for allowing me back in. I apologise to the witnesses for coming in a second time but it does relate to what I said earlier before the witnesses came in about the committee taking more of a role and spending more time and resources with NAMA. I want to briefly touch on a few things and look at something relating to process. I know there is not much that the delegation can say about IBRC but I want to clarify whether NAMA's time horizon for working out those loans as they come across is 2020 as well.
Eoghan Murphy (Dublin South East, Fine Gael)
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That would be an amount potentially in the region of €20 billion?
Eoghan Murphy (Dublin South East, Fine Gael)
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Is it envisaged that this will come into NAMA or will a second NAMA be set up?
Eoghan Murphy (Dublin South East, Fine Gael)
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So NAMA will work them through those two different special purpose vehicles?
Mr. Brendan McDonagh:
Yes. The board is very clear that even though there will be consolidated reporting, we will disclose the figures and performance separately between the existing NAMA book and the future IBRC book.
Eoghan Murphy (Dublin South East, Fine Gael)
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So IBRC moving across will in a way completely undo NAMA's business strategy?
Mr. Brendan McDonagh:
No, there is a synergy to be had. We had an existing loan book where we had worked out strategies for each of the 800 debtors. We are now getting 2,400 debtors, excluding the residential mortgages whose strategy will be determined by the Central Bank's mortgage code of practice anyway. It will just mean that we must look at those 2,400 debtors and figure out whether the strategies put in place by IBRC were appropriate or whether we will need to revise them.
Eoghan Murphy (Dublin South East, Fine Gael)
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Can NAMA do that? Can it manage the assets in terms of the asset management phase NAMA is now in - working on the first SPV while then doing all that diligence work on the second?
Eoghan Murphy (Dublin South East, Fine Gael)
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That, in itself, will take time.
Eoghan Murphy (Dublin South East, Fine Gael)
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The other issue was the relationship to the troika because it was mentioned a few times. It set the repayment schedule for the bonds up to 2020.
Mr. Brendan McDonagh:
It has set the repayment schedule on the NAMA bonds definitively up to the end of 2013 while Ireland is in the bailout programme and clearly has an interest post-2013, particularly the ECB, because the bonds we give to the banks are being used by the banks to get money from the ECB so it would have an interest in how quickly we can work it out. The ECB would be broadly aware of our plans to get all that done by 2020.
Eoghan Murphy (Dublin South East, Fine Gael)
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The plan we have in place and the targets we were talking about earlier - 50% by 2016 and 80% by 2018 - were set by the troika.
Eoghan Murphy (Dublin South East, Fine Gael)
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Did the troika set them?
Eoghan Murphy (Dublin South East, Fine Gael)
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Will the troika have influence post-2013 on the repayment schedule were it to feel that the targets might need to change?
Mr. Brendan McDonagh:
It will be a very involved interested party given that the banks we give the NAMA bonds to are re-pooling them with the Central Bank.
1:20 pm
Eoghan Murphy (Dublin South East, Fine Gael)
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Can I take it that it had an involvement before 2013 not only in setting the schedule but how that schedule was met?
Eoghan Murphy (Dublin South East, Fine Gael)
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Was it dictating the sale, say, of overseas assets ahead of Irish assets?
Mr. Brendan McDonagh:
No, that was set by the NAMA board. Part of the troika's mission over the last three years has been to examine whether NAMA has been following the correct strategy and it has been satisfied that we have been following the correct strategy because we are generating the cash to pay back the debt.
Eoghan Murphy (Dublin South East, Fine Gael)
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Was it directing the board in any way?
Eoghan Murphy (Dublin South East, Fine Gael)
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Not at all?
Eoghan Murphy (Dublin South East, Fine Gael)
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So it reserves the right to try to direct the board but has not done so.
Mr. Brendan McDonagh:
It would do it through the Minister because the Minister can issue directions to the board of NAMA.
Eoghan Murphy (Dublin South East, Fine Gael)
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On the 25% we will see repaid at the end of this year, did directions come from the Minister to the board?
Mr. Brendan McDonagh:
Yes, the Minister said as part of the program of conditionality, which is published, NAMA would repay 25% of this debt by the end of 2013.
Eoghan Murphy (Dublin South East, Fine Gael)
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Has the Minister had to redirect the board as to how that gets-----
Mr. Brendan McDonagh:
No, the Minister has asked if we will do it, we have said yes, and that is fine. It is reported back through the Department of Finance, which also has a role in reporting back to the troika on whether we will meet that. It is followed up with the quarterly meetings where I appear before the troika and discuss those strategies and whether we are generating the cash sufficiently quickly.
Eoghan Murphy (Dublin South East, Fine Gael)
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Mr. McDonagh meets the troika every quarter.
Eoghan Murphy (Dublin South East, Fine Gael)
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Is that to update it?
Eoghan Murphy (Dublin South East, Fine Gael)
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Does the troika try to impose its will in any way?
Eoghan Murphy (Dublin South East, Fine Gael)
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I would like to ask some questions on the process in terms of NAMA's operations. How does NAMA market its properties or loan books to potential investors, who may be overseas?
Mr. Brendan McDonagh:
Where it is an underlying property we ensure the debtor appoints a property agent with a duty of care to NAMA and that it is advertised and openly marketed. For a loan sale, we appoint a loan sales broker. We have a loan sale brokers panel, which is published on our website. That loan sales broker would contact all the people in the market who are buying loans. We would also put the broker in contact with people who have visited us and who have said they are interested in loan sales, to ensure they get an opportunity to consider a loan sale if it is available.
Eoghan Murphy (Dublin South East, Fine Gael)
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Would foreign banks or funds approach NAMA directly without an agent being involved?
Eoghan Murphy (Dublin South East, Fine Gael)
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Would they come to NAMA and say they would like to invest a certain amount?
Mr. Brendan McDonagh:
Yes, we have had direct approaches but the board has a clear policy that everything must be openly marketed, so if we are going to put something up for sale we appoint a loan sales broker because we want to be fair to other people who have expressed an interest in portfolios and ensure they get an opportunity to bid for it too.
Eoghan Murphy (Dublin South East, Fine Gael)
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When Mr. McDonagh talks about it being a competitive process, if there is, say, a property in Dublin and an approach is made by a fund of investors on that property, must NAMA let others know it is engaging with that fund?
Mr. Brendan McDonagh:
We would appoint a well-known agent. We would ask the people on our database what kind of properties they are interested in. Some people are interested in hotels, development land, offices or industrial properties. If an office was going up for sale we would tell the agent the names of the people interested in an office property and ask the agent to contact them to let them know the property is for sale, along with all the agent's contacts.
Eoghan Murphy (Dublin South East, Fine Gael)
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Does NAMA ever get multiple approaches and then not sell?
Eoghan Murphy (Dublin South East, Fine Gael)
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Who makes that assessment? If they offer 20% of what NAMA thinks it is worth it is clear, but what if it is closer than that?
Eoghan Murphy (Dublin South East, Fine Gael)
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Is that the risk assessment committee?
Eoghan Murphy (Dublin South East, Fine Gael)
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If we do not make a decision, or if we make a decision to invest, the risk if that goes wrong is carried by the board but falls, ultimately, on the taxpayer, for example the Aspen deal where NAMA has invested.
Mr. Brendan McDonagh:
In that instance we took 20% of the equity. That was a credit committee decision. We believed there was some potential upside in the portfolio and the best way to achieve a higher price for the portfolio was to take a 20% stake. That was a purely commercial decision which went through an assessment by internal people who are bankers and corporate finance professionals. A recommendation went to the credit committee which could have rejected or accepted it.
Eoghan Murphy (Dublin South East, Fine Gael)
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Was the best way to achieve a higher assessment of the portfolio for NAMA to take a stake in it?
Eoghan Murphy (Dublin South East, Fine Gael)
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I want to talk about the Aspen deal. NAMA sold a portfolio of loans. It provided the finance for people coming in to buy those loans and invested itself. Is that not a massive exposure for NAMA on one portfolio?
Mr. Brendan McDonagh:
No, because we still have our first charge over the assets. Before we sold the portfolio we had 100% risk. We de-risked it to 60% because we got an equity cheque of 40% on day one, and we retained the possibility that if the assets were sold for a higher price than that at which we sold them to the buyers we got 20% of any upside.
Eoghan Murphy (Dublin South East, Fine Gael)
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What if they sold for less?
Eoghan Murphy (Dublin South East, Fine Gael)
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Is that not a double loss for NAMA?
Eoghan Murphy (Dublin South East, Fine Gael)
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However, NAMA would not have sold it had it not given the finance to buyers or got involved itself.
Eoghan Murphy (Dublin South East, Fine Gael)
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If there was another buyer why did NAMA get involved?
Eoghan Murphy (Dublin South East, Fine Gael)
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They only bought it because NAMA got them the finance.
Mr. Brendan McDonagh:
People buy portfolios for different reasons. I do not want to get into the specifics of one individual transaction because it would be unfair and nobody will do business with us if we talk about individuals. The buyers on the other side are no fools. They understand about investing in the Irish market. This was the first pure Irish loan portfolio that NAMA was selling on the Irish market. It sent a very important signal to international investors who were considering investing in Ireland that we are commercial and are prepared to do business at a price that is acceptable to us.
Eoghan Murphy (Dublin South East, Fine Gael)
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So we inflated the price to make a good impression?
Eoghan Murphy (Dublin South East, Fine Gael)
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Somebody came to NAMA from the private sector looking to invest in this and NAMA said we will sell it to ourselves for more.
Eoghan Murphy (Dublin South East, Fine Gael)
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It is the price NAMA paid because it had the money.
Eoghan Murphy (Dublin South East, Fine Gael)
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NAMA sold it to itself though.
Eoghan Murphy (Dublin South East, Fine Gael)
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NAMA provided the finance for other people to buy it from NAMA and brought the price to €35 million by getting involved.
Eoghan Murphy (Dublin South East, Fine Gael)
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It is a false market if one is buying from oneself.
Eoghan Murphy (Dublin South East, Fine Gael)
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It is not false market, it is a commercial decision by the buyer and NAMA about whether we want to do business. At the start of last year nobody was queueing up to buy assets in the Irish market. Initiatives we are engaged with are bringing activity and investors to the Irish market.
No one was queuing up so NAMA decided to queue up for itself.
1:30 pm
Eoghan Murphy (Dublin South East, Fine Gael)
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Is this an example of the State getting involved in a market that it controls because it controls the product it is selling?
Eoghan Murphy (Dublin South East, Fine Gael)
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We have had this previously with another agency which had a mandate to perform a role in a particular part of Dublin. It decided to get involved in providing financing and acquiring loans and it worked out poorly for us. NAMA is dealing with the legacy of that.
Mr. Frank Daly:
There are two elements to that. There is the vendor finance, which is standard practice in the market. We are getting a good return on the provision of such finance in this case. Vendor finance does many other things. It brings other people to the table. It helps to increase the competitiveness for one's assets and to increase the price. I have been before the committee when we have been questioned about where we sold on assets and then they increased in value but NAMA was out of it. Here is a commercial opportunity, therefore, to see if there is an upside to this that NAMA would continue to get a payback. I acknowledge the general point the Deputy is making but, at the end of the day, we are a commercial organisation and we are not going to take equity stakes in everything we sell but here was one. I can assure the Deputy we went through it in detail. The case came to be the board, went to a credit committee and went through a rigorous evaluation. The package at the end was a very good commercial outcome for NAMA.
Eoghan Murphy (Dublin South East, Fine Gael)
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NAMA is a commercial operation but the risk falls on the State. The agency provides vendor financing to bring other people to the table but it has only brought itself to the table. Mr. Daly referred to a rigorous process but we cannot see that.
Mr. Frank Daly:
One of the most rigorous parts of the evaluation of that and any other sale is the risk element. If the Deputy saw the plethora of papers that comes to the credit committee or board regarding a transaction such as that, he would have everything, including a detailed risk assessment. At the end of the day, that is the call we have to make. I can assure him that as far as the board and the executive of NAMA is concerned, we were very satisfied in this particular transaction with the outcome.
Eoghan Murphy (Dublin South East, Fine Gael)
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I am sure. Mr. McDonagh when referring to salaries and retention of expertise in his opening statement was giving a warning in a sense in the context of the commentary in the past about a soft landing and the questions about why we were not warned. When we look back at another area in which a State agency made a big mistake, we see all the meetings were held, different discussions and papers were involved and all the rigorous process was gone through but it was a massive mistake for the State. I have a worry when I see this as NAMA stepping outside its brief in this regard by getting involved with private entities to purchase loans from itself. I have a concern about that.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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We will take that as a statement. Has NAMA costed the impact of the freedom of information, FOI, legislation? How much will it cost to deal with FOI requests? I have no doubt the agency will be busy in this regard. How many additional staff will be needed? What concerns does Mr. McDonagh have about the commercial sensitivity of information?
Mr. Brendan McDonagh:
I think I said to the committee previously - and I certainly did to the Joint Committee on Finance, Public Expenditure and Reform - that if FOI is applied to NAMA, we will operate within that. Clearly it will have implications for NAMA. Many people have an interest in the agency in terms of FOI requests and, therefore, we have advertised to recruit four specialist FOI staff to deal with that and see how it goes. We have talked to other bodies that have become subject to the legislation. We have projected based on their experience that we could have between 500 and 1,000 FOI requests in our first year. Clearly, there will be costs in trying to deal with that.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Will those four people deal with them?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Will the cost be contained within their salaries?
Mr. Brendan McDonagh:
Yes. Obviously, there will be allocation of management time involving myself and the head of communications strategy in terms of dealing with that but we expect four additional people will be required to deal with that. The Government had made that decision, that will be the law and we will deal with it appropriately.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Will Mr. McDonagh provide the committee with the salary bands for employees, which was mentioned earlier in the context of developers being paid?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Is that the most up to date?
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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Deputy Dowds asked for information, which can be forwarded to the clerk to the committee. When we opened the meeting, Deputy Murphy said that because of the activities of NAMA, IBRC and so on, he may ask NAMA representatives to attend the committee more than once a year, which they will be delighted to hear. We hope that we will engage them again generally on two or more occasions on their work.
John McGuinness (Carlow-Kilkenny, Fianna Fail)
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The witnesses are very popular. The FOI legislation might remove some of the need to bring them back. I thank them and the committee members. Is it agreed to dispose of NAMA financial statements for 2012? Agreed.